Yen set to extend upward leg - Natixis

According to Nordine NAAM, Research Analyst at Natixis, yen is likely to extend its upward leg, fuelled by the renewed risk aversion caused by the geopolitical tensions between the US and Russia (after the US airstrike in Syria) and between the US and North Korea.

Key Quotes

“Since the start of the year, the Japanese yen has appreciated sharply, in particular against the US dollar, the USD/JPY pulling back from a high of 118.60 at the start of January to 111.60 at end March. The USD/JPY’s correction has stemmed mainly from the dollar’s bout of weakness, in reaction to the protectionism advocated by Donald Trump and to the cautious rhetoric of the Federal Reserve.”

“Since the start of April, the yen has extended its rise, fuelled by the renewed risk aversion caused by the geopolitical tensions between the US and Russia (after the US airstrike in Syria) and between the US and North Korea. Given Japan’s geographical proximity to North Korea and the sabre-rattling by the Pyongyang regime, the Japanese yen clearly played its role as a safe haven, all the mores so since Japan’s current account surplus reached a new high in February. The question now is whether the yen has more upside potential in coming weeks.”

“So far, the USD/JPY has remained correlated to US Treasuries. The pair is continuing to track closely changes in US long interest rates, with US Treasuries also acting as a safe haven play in the face of the political risks mentioned above. In the short term, however, there are other factors that could fuel a temporary appreciation of the Japanese currency. One such factor is the presidential election in France, with the first round on 23 April and the second round on 7 May. Before that, in the very near term, there is the Q1 earnings reporting season in the US. Over this period, volatility tends to rise, particularly if the market has doubts over the earnings outlook.”

“Finally, the market has high expectations when it comes to Trump’s tax reform. If the US president is slow in announcing details concerning this reform, this risks triggering some profit-taking on US equities, in turn driving up the yen. In other words, there is a window of several weeks during which the yen could appreciate, bearing in mind the USD/JPY can be expected to resume its rise by June, when the greenback will be stronger, bolstered by a further hike in the Fed Funds rate. In the very near term, however, the USD/JPY could test 107 if the risks mentioned above crystallise.”

“At the same time, the yen should appreciate that much more against the Australian currency, which is extremely sensitive to risk aversion. There is also the fact the Australian dollar is under pressure for reasons of its own, notably the fall in iron ore prices to $68/t after a high at $95/t. This correction stems from the excess production capacity besetting the Chinese construction sector and from the significant inventories. Iron ore prices recently tested a low of $68/t.”

“Under these conditions, there is a risk the AUD/JPY will correct towards 80 in the very near term. Come June, however, the USD/JPY could resume its rise on the back of a stronger US dollar.”