Date: 28 Jun 2017

One noticeable element of Monday’s price action was the underperformance of the Japanese yen. While the US dollar struggled versus currencies such as the euro (EURUSD), the Canadian dollar (USDCAD), the British pound (GBPUSD) and the Swiss franc, the greenback gained versus the yen (USDJPY). As a consequence the yen broadly slid in value. It may well be that markets have, at least for the moment, concluded that with other central banks edging away from current ultra-accommodative policy settings while the Bank of Japan remains committed to very loose monetary policy, the yen is a candidate for a funding currency in carry plays.

Certainly US firm Morgan Stanley is of that mind writing about USDJPY on Monday that if would need a “break [of] the 112.10 top to open potential to 114.40, its high traded in May.” Morgan Stanley was also bullish on the prospects for the yen crosses. Japan’s Mitsubishi UFJ Financial Grouo (MUFG) has also been casting its eye over possible carry trades and also sees the yen as the likely “funder.” Referring to low volatility conditions in FX that in the past have prompted traders to look at carry trades, MUFG wrote Monday that in such an environment “the yen should be the currency that suffers and while the yen has weakened modestly there must be a risk of greater under-performance over the coming days and weeks if these market conditions persist.” Time will tell but it’s worth bearing in mind.

Written by Neal Kimberley, External Currency Analyst.