Japanese Yen hits drift closer to the key 160.00 level as risk appetite fades
- USD/JPY extends gains to hit fresh two-week highs at 159.75.
- Soft Japanese GDP data cast doubts about the BoJ's monetary tightening pace.
- Rising geopolitical tensions are providing support for the safe-haven US Dollar this week.
The Japanese Yen (JPY) accelerates its decline as the US Dollar (USD) draws support from a sourer market mood, with investors wary of a re-escalation of tensions in the Middle East. The USD/JPY pair appreciates for the second consecutive day, reaching the 159.75 area and drawing closer to the 160.00 level, considered a line in the sand for Tokyo authorities.
Markets are on a risk-off mood on Tuesday as the Memorandum of Understanding signed by the US and Iran in June expired on Monday, with both parties still far from a durable peace agreement.
Beyond that, Washington and Iran have ramped up their threats. US President Donald Trump threatened to bomb Oman, hitherto an ally, if it “gets in the way” of an agreement with Iran. Iranian authorities, in turn, announced that they would shift to a “fully offensive” military stance, further straining an already fragile ceasefire and hammering investors' appetite for risk.
Soft Japanese data has undermined support for the Yen
In Japan, Gross Domestic Product (GDP) figures released on Monday missed expectations, as economic growth slowed to 0.3% in the second quarter, down from 0.5% in the previous quarter, casting some doubt on the pace of the Bank of Japan’s (BoJ) monetary tightening cycle.
Looking ahead, Analysts at UOB Group observe that the US Dollar's “underlying tone still appears to be firm, and the bias remains tilted to the upside.” UOB, however, expects price action to remain contained in the near-term, judging that “a narrower range of 158.00/160.20 is likely enough to contain the price movements.”
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.