FX Update: The JPY should be getting more love here
Summary: The commodities correction and the likely related easing lower of bond yields over the last couple of sessions are offering strong support for a comeback in the Japanese yen here, and the low CPI data out of Japan overnight reminds us that Japanese real yields have remained far more positive than elsewhere despite the fuss over inflation and despite the very weak Japanese yen of the last twelve months.
FX Trading focus: Shouldn’t the JPY be getting more love here?
The Japanese yen has been very weak over the last twelve months on the argument that a global reflation is JPY negative, particularly with the steepening of global yield curves on the anticipation of a durable inflation cycle settling in at a time when Japan’s central bank has moved to explicitly cap its ten year yield at 0.25%. This has kept the yen very sensitive to rising long yields, especially this year and the rise at the longer end of the US and other yield curves. But a couple of developments here are reminding us that the JPY weakness has perhaps extended too far, and this is not just due to a chunky consolidation in commodities prices here and the softening of long yields, especially yesterday. To these JPY-supportive factors we have to add the reminder overnight of Japan’s seeming immunity to rising prices elsewhere, even as its currency has been very weak over the last twelve months. The headline April CPI number was out at -0.4% year-on-year (-0.5% expected) and the core ex Fresh Food and Energy was -0.2% vs. -0.1% expected. Real yields in Japan, in other words are positive in April when US yields went to worse than -400 basis points in that month! Not sure if the market will pick up on this perspective, but the facts on the table remind us of the fundamental support that the yen is retaining is purchasing power at the moment.
The last missing piece that would drive a more determined JPY consolidation higher and possibly even a notable spike, as I discussed in a recent post, would be anything that spooked credit and saw a widening in credit spreads in corporate- and emerging market debt, something that has been largely absent as a factor since the pandemic broke out last year, although we are seeing some modest widening of US corporate credit spreads over the last couple of weeks.
Chart: USDJPY
Yesterday we looked at an AUDJPY chart, one that is likely to suffer a further consolidation lower if iron ore and other metals prices continue to correct. But here we have a look at USDJPY, the most important JPY pair and one where the rally this year was largely triggered by the rise in US nominal yields this year – with the sharpest portion of the gains associated with the rise in US nominal yields outpacing the rise in real yields as priced by breakevens. With breakevens largely correlated with crude oil prices, these have sunk in recent days, and the still-low Japanese CPI overnight from Japan reminds us that Japanese real yields never really faltered as they have elsewhere. Interesting to watch here if the JPY rises not just in the crosses, but across the board if global safe haven bond markets continue to find strength and the commodities correction deepens. A move below the 108.50-108.00 support zone could augur well for the bears looking for a test back toward the 200-day moving average near 106.00 or even the major Fibonacci support at 105.79.
John Hardy
Head of FX Strategy
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FX Trading focus: Shouldn’t the JPY be getting more love here?
The Japanese yen has been very weak over the last twelve months on the argument that a global reflation is JPY negative, particularly with the steepening of global yield curves on the anticipation of a durable inflation cycle settling in at a time when Japan’s central bank has moved to explicitly cap its ten year yield at 0.25%. This has kept the yen very sensitive to rising long yields, especially this year and the rise at the longer end of the US and other yield curves. But a couple of developments here are reminding us that the JPY weakness has perhaps extended too far, and this is not just due to a chunky consolidation in commodities prices here and the softening of long yields, especially yesterday. To these JPY-supportive factors we have to add the reminder overnight of Japan’s seeming immunity to rising prices elsewhere, even as its currency has been very weak over the last twelve months. The headline April CPI number was out at -0.4% year-on-year (-0.5% expected) and the core ex Fresh Food and Energy was -0.2% vs. -0.1% expected. Real yields in Japan, in other words are positive in April when US yields went to worse than -400 basis points in that month! Not sure if the market will pick up on this perspective, but the facts on the table remind us of the fundamental support that the yen is retaining is purchasing power at the moment.
The last missing piece that would drive a more determined JPY consolidation higher and possibly even a notable spike, as I discussed in a recent post, would be anything that spooked credit and saw a widening in credit spreads in corporate- and emerging market debt, something that has been largely absent as a factor since the pandemic broke out last year, although we are seeing some modest widening of US corporate credit spreads over the last couple of weeks.
Chart: USDJPY
Yesterday we looked at an AUDJPY chart, one that is likely to suffer a further consolidation lower if iron ore and other metals prices continue to correct. But here we have a look at USDJPY, the most important JPY pair and one where the rally this year was largely triggered by the rise in US nominal yields this year – with the sharpest portion of the gains associated with the rise in US nominal yields outpacing the rise in real yields as priced by breakevens. With breakevens largely correlated with crude oil prices, these have sunk in recent days, and the still-low Japanese CPI overnight from Japan reminds us that Japanese real yields never really faltered as they have elsewhere. Interesting to watch here if the JPY rises not just in the crosses, but across the board if global safe haven bond markets continue to find strength and the commodities correction deepens. A move below the 108.50-108.00 support zone could augur well for the bears looking for a test back toward the 200-day moving average near 106.00 or even the major Fibonacci support at 105.79.
John Hardy
Head of FX Strategy
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
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