Date: 13 Jul 2018

Perhaps the most intriguing aspect of the recent price action in USDJPY is how, even as China-US trade relations have deteriorated, not only has the yen not (as has often been the case in the past) proved to be a safe haven currency, it has weakened. There is an argument of course that the attraction of short end US Treasury yields, in comparison to the derisory returns on offer in Japanese Government Bonds, has supported the move higher in USDJPY. But that yield differential is nothing new so, while potentially a contributory factor, traders might take some convincing that it is the primary driver of yen weakness. Writing on Wednesday, US bank Goldman Sachs argued that, due to their exposure to Chinese supply chains, the currencies of “small open Asian economies,” such as South Korea and Taiwan, might be vulnerable in the event of escalating China-US trade tensions. Yet could the same logic not apply to Japan? As a large open Asian economy, with extensive economic connections to China, might not Japan’s currency also be vulnerable? Perhaps the market has drawn that conclusion. Traders will have their own views but such an explanation might account for, at least in part, the yen’s recent behaviour. If so, then, unlike on previous occasions, a continued ratcheting up of China-US trade tensions might mean even more yen weakness. In the meantime, on the topside in USDJPY, although likely barrier option protection at 113.00 might make that level both a target for the market to aim for but also ‘a tough nut to crack,’ if it was to be breached traders might then look at the 2018 high of 113.38, that printed in January, as key.