JPY - FUNDAMENTAL DRIVERS
Fundamental bias: Bearish
1. Safe-haven status and overall risk outlook
As a safe-haven currency, the market's risk outlook is the primary driver of JPY. Economic data rarely proves market moving; and although monetary policy expectations can prove highly market-moving in the short-term, safe-haven flows are typically the more dominant factor, especially in the current. The market's overall risk tone has improved considerably following the pandemic with good news about successful vaccinations, and ongoing monetary and fiscal policy support paved the way for markets to expect a robust global synchronized economic recovery and reflation environment. Of course, there remains many uncertainties and many countries are continuing to fight virus waves but as a whole the outlook has kept on improving over the past couple of months, which would expect safehaven demand to diminish, resulting in a weak bearish fundamental outlook.
2. Low-yielding currency with inverse correlation to US10Y
As a low yielding currency, the JPY usually shares an inverse correlation to strong moves in yield differentials as it affects carry trade dynamics. Like most correlations, the strength of the inverse correlation between the JPY and US10Y is not perfect and will ebb and flow dependent on the type of market environment from a risk and cycle point of view. From the start of the year, (as the bias for US10Y started to tilt higher) the inverse correlation has been exceptionally strong over the past couple of weeks and moves in the US10Y continue to dominate JPY price action. As long as the med-term bias for US10Y remains titled higher, that should put additionally downside pressure on the JPY. Month-end flows was the main culprit to blame for the big jolt higher in the JPY at the end of May as Citi bank noted that Japanese investors are expected to sell the JPY in order to hedge against foreign bonds. With month-end flows out of the way, we expect US Yields once again to be the main driver for the JPY in the weeks ahead which means key economic data that influences bonds will be important to watch for the JPY apart from the overall risk tone.
1. Safe-haven status and overall risk outlook
As a safe-haven currency, the market's risk outlook is the primary driver of JPY. Economic data rarely proves market moving; and although monetary policy expectations can prove highly market-moving in the short-term, safe-haven flows are typically the more dominant factor, especially in the current. The market's overall risk tone has improved considerably following the pandemic with good news about successful vaccinations, and ongoing monetary and fiscal policy support paved the way for markets to expect a robust global synchronized economic recovery and reflation environment. Of course, there remains many uncertainties and many countries are continuing to fight virus waves but as a whole the outlook has kept on improving over the past couple of months, which would expect safehaven demand to diminish, resulting in a weak bearish fundamental outlook.
2. Low-yielding currency with inverse correlation to US10Y
As a low yielding currency, the JPY usually shares an inverse correlation to strong moves in yield differentials as it affects carry trade dynamics. Like most correlations, the strength of the inverse correlation between the JPY and US10Y is not perfect and will ebb and flow dependent on the type of market environment from a risk and cycle point of view. From the start of the year, (as the bias for US10Y started to tilt higher) the inverse correlation has been exceptionally strong over the past couple of weeks and moves in the US10Y continue to dominate JPY price action. As long as the med-term bias for US10Y remains titled higher, that should put additionally downside pressure on the JPY. Month-end flows was the main culprit to blame for the big jolt higher in the JPY at the end of May as Citi bank noted that Japanese investors are expected to sell the JPY in order to hedge against foreign bonds. With month-end flows out of the way, we expect US Yields once again to be the main driver for the JPY in the weeks ahead which means key economic data that influences bonds will be important to watch for the JPY apart from the overall risk tone.
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