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Market Analysis

Fundamental Analysis: Yen Firms on Stock Market Caution

February 14, 2019
BY Michael Stark

The yen has made a limited upward movement so far today against various major currencies amid higher than usual volatility. The Japanese currency received some support from the slight retreat of shares in Tokyo. Also a factor was this morning’s data, suggesting a modest recovery from last summer’s disruption due to natural disasters.

EUR-JPY dropped back below the important area of ¥125. The pound also gave up yesterday’s big gains, returning to around ¥142.45. The US dollar though has continued to strengthen against the yen, although more slowly than at the start of the week. USD-JPY is currently trading very slightly below ¥111.

Shares in focus as usual but data also noted

This morning’s slightly lower close for the Nikkei 225 appears to be a result of profit-taking by traders. Although only a slight loss of 5 points, the prevailing mood in today’s Asian session was ‘wait and see’. Reports that the latest Sino-American tariff talks might be extended are more of a volatility factor than a clear positive for shares.

The yen’s inverse correlation with shares, and especially Asian shares, has been in focus for all of 2019 so far, given the high volatility in equity markets since late last year. Meanwhile, another minor positive was data from Japan this morning. The releases were reasonably good for the yen considering the circumstances.

Many expected 2018’s summer of disasters in Japan to hit annual GDP growth hard. However, YoY GDP growth, adjusted for the fourth quarter, actually met the consensus of 1.4% exactly. Better than expected figures for quarterly GDP capital expenditure and external demand also gave JPY limited tailwinds.

So much for the yen against most currencies, but USD-JPY is less affected by these factors due to rates. The current differential of 2.35-2.6% is a powerful barrier for potential sellers of this symbol. Monetary policy remains unlikely to move out of view for dollar-yen, except in cases of major stock corrections and upticks in ‘risk-off’ sentiment.

Concentration on the Nikkei and sentiment

The Nikkei 225 is the key focal point for traders of the yen into the end of the week, given its importance for the currency. Tariffs and related uncertainty mean that mining, shipbuilding and metalworking are probably the most important industries for the Nikkei average in the coming weeks.

Sentiment — while harder to gauge — is another factor to determine the yen’s direction into next week. Gains for ‘risk-on’ currencies like the Oceanic dollars and less disappointing data from Europe would be negative for the yen.

Mixed picture for the yen, especially against King Dollar

Overall, the yen’s fundamentals are somewhat mixed. For most of its pairs, the base currency is more likely to be the driver in the near future. EUR-JPY and GBP-JPY might continue their slight declines or at least remain broadly stable for the rest of the week. However, an upward direction is more favorable for USD-JPY, barring major losses for global shares.

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