JPY: Caught Between Beijing and Jackson Hole?
Friday may have seen the USD slip against a number of currencies but it was noticeable that the greenback held its own against the Japanese yen (USDJPY). One explanation might lie in the fact that while the currency market perceived Fed Chief Jerome Powell’s Jackson Hole speech as not particularly hawkish, the direction of Fed monetary policy remains on a far tighter trajectory than the Bank of Japan (BOJ). If anything last week’s Japanese inflation data indicated that while inflation in Japan might be modestly rising, it will still take years of ultra-accommodative monetary policy from the BOJ to get to its 2 per cent target. At the same time, Friday’s announcement by the People’s Bank of China (PBOC) that the counter-cyclical factor is again being applied to the daily calculation of the yuan’s value may have also impacted the JPY. Application by the PBOC of the counter-cyclical factor, in a circumstance of prior and continuing yuan (USDCNH) depreciation, should lend itself to a stable or stronger Chinese currency. By extension, as currency market concerns about the pace of yuan weakness have previously fueled broader flows out of emerging markets, then the PBOC move may not only stabilize the yuan. It might, by extension support other emerging market currencies. But what has any of this to do with the JPY? Emerging market exposures, as in any currency position, are not one-sided. Being long one currency means being short of another. Due to the fact that Japanese interest rates are negligible, the JPY is often the currency that the currency market chooses to short when going long of something else. This applies to emerging market currencies just as to developed ones. Consequently if yuan weakness has helped drive wider emerging market currency weakness, to the extent that those trades were funded by being short of JPY, then the selling of those emerging market currencies also necessitated buying back the JPY. So, when the PBOC on Friday re-activated the counter-cyclical factor, lending support to the yuan and the wider emerging markets, renewed currency market appetite for those currencies also entailed some selling of JPY to fund the position. Whether that sentiment continues into the new week remains to be seen but, at the very least, some attempt to explain why the JPY underperformed on Friday, as evidenced in pairs such as EURJPY and AUDJPY, even though the USD traded softer, might help traders formulate their JPY strategy for the new week.
by Neal Kimberley, External Currency Analyst.