As dollar weakness and elevated levels of volatility have continued to dominate the conversation around markets, the Japanese Yen has broken out to multi-year highs and seems to be gaining further momentum.
Much of the action in the Yen can be attributed to its central place in world markets during times of rising volatility and dollar weakness. The Yen is often seen as a stabilizing “safe haven” asset during times of market turmoil and is a prominent beneficiary of dips in the greenback.
Adding to those fundamental market dynamics, important headlines are emerging from Japan as well.
Notable market moving developments from Japan the past week:
- Bank of Japan Governor Haruhiko Kuroda was nominated for a second term in a move widely cheered by markets. Kuroda’s leadership has been marked by aggressive policies to weaken the Yen and drive inflation in Japan.
- Finance Minister Taro Aso dismissed the need to intervene to slow the rising Yen earlier in the week. A rising Yen is directly counter to current monetary policy in Japan, and it is generally expected that Japan will do what is necessary to keep Yen values low.
- Later in the week, Aso reversed course and said he would deal with the “one-sided” moves in the Yen with “a sense of urgency”, and effectively issued a warning that Japanese policymakers would be active in doing what is necessary to keep the Yen weak. Of course, this was in contrast to what he said earlier in the week and seemed to indicate a growing frustration within the BOJ.
While the nomination of Kuroda should be seen as supportive of a continuation of weaker Yen policy, markets have largely shrugged off this development as no more than an extension of the status quo. The policy behind the Yen might continue to have a bias for weakening, but if the dollar is sinking faster, the Yen will rise in comparison. The dollar theme will almost always drive this pair, and the current frame is no exception.
With that in mind, Aso’s comments earlier in the week certainly did nothing to dissuade a sharp ascension in Yen value versus the dollar, while his comments later in the week have had little measurable effect.
And while the market will digest the second comment and watch for signals for any tangible action to stall the Yen’s rise, it does not seem at this juncture that a simple round of talking down the currency or any idle threats to consider action will be enough to blunt this current move.
Outlook for the Yen for Next Week
The USDJPY pair has cleanly broken down below a multi-year trend line and is now touching levels not seen since November of 2016.
The pair had light resistance and the potential for a bounce around the 107.09 level, but that did not coalesce.
Moving ahead, we could envision a scenario where that former level of potential support becomes resistance.
While it is challenging to assess how much lower USDJPY can venture, our baseline view is that this could possibly be a new range and the top of that range could be roughly between the 107.30 to 107.50 level as former support becomes resistance.
There could be further dips lower, but the pace should abate and eventually stall. It is difficult to see much more depreciation without Japanese policymakers stepping up their rhetoric to talk the Yen back down, which over time should have some effect on markets, especially if current levels of equity volatility cool somewhat. An expectation of the pair ranging between 107.50 and 105.50 next week is well supported.
Risks to this outlook include a rapid escalation of equity market or dollar drama which could resume the Yen’s sharp move lower. On the flip side, if markets relax from current stress levels and start to more fully price in the impacts of future rate hikes in the US and the resulting potential dollar strength, the Yen could become weaker than expected in response.