Trouble in Paradise: Chronicling the USD/JPY’s Shaky Safe-haven Status

(By Malaika Cornelio & Nathan Nowbuth) 

Background 

The Yen’s safe-haven status has been contested from the very start of 2019, attributing to its liquidity-and-algorithm-driven ‘flash crash’ just after New Year’s Day. This sudden 3% spike in the yen forewarned the all-year-round inclement market climate that traders prepared to steel themselves against.  

Next on the gloomy 2019 timeline charting the Yen’s long-term weakness were the Japanese economy’s macro indicators: slowing economic growth, trade deficit figures remaining unchanged from 2018 and approximately $190bn international mergers and acquisitions allocated by Japanese companies, to name a few. These factors manufactured the perfect conditions for a gloomy market atmosphere, in stride with the initial escalation of the US-China trade war: the rise of a strengthening yen and lower government bond yields, hectoring the 2% inflation target that the BOJ’s dogged yield curve control measures were put up to achieve in the first place.  

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Figure 1: Forecast for the Japanese Bond yield where a positive yield is currently expected after ~9 years 

Alluding to Japan’s status as the world’s biggest creditor nation, investors’ reduced appetite for risk directly correlates to the Yen’s appreciation, eponymous with its ‘safe-haven’ classification. The USD/JPY pairing also has a customary association with the ‘carry’ trade, which is a trading strategy wherein speculators borrow money at low interest rates, and purchase assets with higher yields in a different currency. Given the BOJ’s persistently low interest rates to convalesce the whey-faced consumption activity in Japan, the carry pattern still persists. 

Fundamental analysis 

To summarize the USDJPY pairing’s nature, investor perception of security in the yen makes the upward movement of its price journey foreseeable. However, the undercurrent of implied volatility suggests the appearance of random detours in the movement of the USD/JPY pairing.  

The current ¥105.60 range is a clear drop from the static ¥106-108 range that persisted even after the Japanese economy recovered from its COVID-19 lockdown disorientation once Greater Tokyo lifted the COVID-19 state of emergency. The previous inert ¥107 average range is a loud insinuation of the inadequacy of investor credence around the world as an obvious result of the pandemic-fuelled global recession. Sedated capital investment also points towards policy inertia and the Yen’s potential path towards becoming an unfavourable choice. The USD/JPY’s slumbering stasis at this range blindsided all market participants, creating an uncomfortable complacency that tipped markets over upon changes in investor sentiments in line with trade and investment flows and geopolitics that finally befell the pairing in September. 

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Figure 2: USD/JPY rates 2019-Present, highlighting a mid-September decline to ¥104.57 

Last month had mixed effects on the Yen, wherein its fall from the “best performing major currency alongside the USD” ran parallel to ailing economy health and political shocks rippling through the forex market at the month-end, especially as global equities turning higher. 

Come October however, the USD/JPY seems to be shedding its sluggish stance – for the worse. Exacerbation of the Yen falling out of investors’ favour are attributable to the recent Tankan survey and investors’ growing penchant for risk-taking ascribed by Washington’s talks over a further fiscal stimulus package to combat cataclysmic consequences of the coronavirus pandemic on the US. Ex-PM Shinzo Abe’s sudden mid-September resignation marked the commencement of the Yen’s restrained nosedive.  

The Tankan Survey illuminated the Japanese economy’s reluctant rate of rebounding from the anaemic economic activity COVID-19, despite the BOJ’s stalwart efforts to stimulate a 2% inflation rate. The survey shows swelling business sentiments and confidence that incumbent PM Yoshihide Suga will be able to pilot the Japanese economy to smoother waters of economic revival, especially as the host nation of the Tokyo Olympics. But the results whipsaw in illustrating what is labelled as “the longest streak of declines” in the nation’s manufacturing sector.  

The country’s monetary policy has remained static even after Abe’s resignation, thus contributing to investors recoiling from the Yen’s safe-haven cachet. However, BOJ’s governor Haruhiko Kuroda’s affirmation to further loosen policy in the event of stagnating recovery may not cause the Yen to change its position too drastically, given the narrow range of policy tools in its arsenal with already-negative rates. 

Conversely, upon news of US President Donald Trump’s contraction of coronavirus, the yen jumped from ¥105.66 to ¥105.17 against the USD, as investors wait for a further $1.6tr fiscal stimulus package proposed by the Trump administration to be delivered by the November elections, as effects from the previous $3tr lifeline program to resuscitate the American economy wanes. This risk-on situation characterised the USD/JPY fall, as investors’ palate for increased risk fortifies the greenback.  

The fundamental outlook of Japanese Yen will continue to shift however, given the universal uncertainty permeating the global economy in the face of rising reinfection rates, and the race to develop a COVID-19 vaccine where the US is one of the frontrunners. 

USD/JPY Technical analysis 

The USD/JPY relative strength index (RSI) at 35.284 is just above oversold status but given the fundamental picture and the lack of substantive support, it is not yet a reversal signal. Therefore, from an RSI perspective, USD/JPY would hold a neutral position. The moving averages are all resistance adjuncts with the 20-day at 105.04 backing the line at 105.572, the 100-day at 106.581 and the 200-day at 107.272 – these are out of the current technical outlook and await a reversal in the USD/JPY for relevance. Overall, the moving averages indicator provides strong evidence to approach the USD/JPY pairing with a sell setup in mind. Both exponential and simple moving averages over the 5, 10, 20, 30, 50, 100 and 200-day time frame signal a short position. The only moving average which doesn’t indicate a sell position is the Ichimoku Cloud Base Line (ICBL) which is currently at 105.474. However, since the other moving average indicators provide such a strong confirmation, the ICBL can be overlooked.  

Given the range trading in August and September, resistance lines are more plentiful and of greater weight with the 105.00 and 105.50 the most important in determining whether the USD/JPY remains in a buy or sell position. Support at 104.20 is of recent vintage, but the lines below have a dual pedigree from the market panic of Coronavirus in March and from the second half of 2016 (from the 2016 Fukushima earthquake) and they are duly weaker. 

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Figure 4 

Analysing this graph above using simple support and resistance also indicates a sell position. The red box shows USD/JPY’s bearish movement since September 11th which signal downwards momentum. USD/JPY has risen considerable since September 21st from 104.010 to 104.840. However, since then, it has retested a previous level of resistance and gone back to a downwards trend to 104.641, suggesting a reversal of the temporary bullish trend. If the sole technique of analysis used is support and resistance, then it would be advisable to wait for another retest in order to gauge whether there is further downwards momentum or in fact more of a ranging pattern, which would represent a neutral stance on USD/JPY.  

From a technical standpoint, the evidence favours a continued downward movement with numerous and well-appointed resistance above, two active channels and limited and weak support lines. 

Jargon Buster: 

  1. Tankan Survey – a quarterly BOJ-curated report that is a guidepost for policymakers 
  1. Safe-haven currency – The yen has traditionally been the go-to currency in times of stress because traders believe the legions of Japanese investors holding money overseas will rush back into Japan when markets are in flux. 
  1. RSI: The relative strength index (RSI) is most commonly used to indicate temporarily overbought or oversold conditions in a market. 
  1. Ichimoku Cloud: The Ichimoku Cloud is a versatile indicator that defines support and resistance, identifies trend direction, gauges momentum and provides trading signals. 
  1. Active channels: Active channels is a simple and effective technical analysis tool for charting and trading on a price trend. Channels can be used to identify a trend and the possible points of a reversal or a price breakout to a different trading level. 
  1. Moving Averages: the moving average is an indicator used to represent the average closing price of the market over a specified period of time. Traders often make use of moving averages as it can be a good indication of current market momentum. 

References 


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