Yen Bears Underpricing Summit Risk?
On the face of it, traders might see a combination of continuing trade tensions, as evidenced in the fractious proceedings at G7, and high event risk surrounding Tuesday’s US-North Korea summit as lending itself to a risk-off environment in which the Japanese yen would benefit. Yet with both those factors present at the Asia opening on Monday, despite an initial dip, USDJPY forged higher. Perhaps traders were instead focusing on Wednesday’s Federal Reserve policy decision where the market has a near certain expectation of a 25 basis point rate hike and where there is a material risk that Fed projections for the number of US rate hikes in 2018 will rise to 4 from 3. Whatever the thinking, USDJPY traded above 110 in early Europe.
One British bank, Barclays, wrote on Monday that “USDJPY remains rangebound with 200dma (110.20) weighing on the topside while the reversal of Italy-related risk aversion provides some support.” Traders might wish to keep that 110.20 level in mind. Additionally, US President Trump said at the G7 that he thought that “within the first minute” he’d be able to judge if North Korean leader Kim Jong Un was ‘serious’ about doing a deal. But Trump also added that if he discerned something positive “won’t happen,” then “I’m not going to waste my time, I don’t want to waste his time.” There’s an argument for saying that an extension of yen weakness is under-pricing the event risk around Tuesday’s US-North Korea summit. Whether the market buys into that thought is, however, quite another matter.
Written by Neal Kimberley, External Currency Analyst.