The yen’s up by nearly 8% against a correcting dollar, and by more than 10% against all the Latam currencies which have been the best FX performers this year. Back in 1998, USD/JPY was halfway through a correction that took it almost back to 100, after rallying from just above 100 to just below 1 150 in1996/1997, and then falling back in 1998/1999. A cynic might point out that US/JPY has averaged 108 over the last 30 years, gyrating in the 75-150 range. All sound and fury, but not actually signifying much! Purchasing Power Parity was never of any use for forecasting but on that basis, USD/JPY was, until a few weeks ago, a chapter relative to the dollar than it has been at any point since the end of Bretton Woods. Over 50 years, USD/JPY has averaged 150, PPP has averaged 170. A 20% JPY overvaluation. From there 40% undervalued is an extreme move and while we can understand why it happened, the potential for a whipsaw correction similar in magnitude to what we saw in 1998/1999, 2002/2004, 2007/2011, or 2016, is clear. Japanese investors have been significant sellers of foreign bonds this quarter, hardly surprising but a positive for the yen on days when geopolitics, energy prices, and the BOJs current policy stance aren’t dominating the market. The story this morning (and catalyst for the yen’s bid, focuses on anti-Covid-Zero protests in China, which have punctured some of the re-opening optimism and hurt risk-sensitive currencies everywhere but AIUD, NZD, and KRW in particular. AUD wasn’t helped by weak retail sales., either. The euro started slowly but has found a bid amid ongoing slightly hawkish ECB rhetoric. Ahead, we have CPI data this week (Germany tomorrow, EZ on Wednesday) and we expect lower core inflation for the Eurozone, and I’m not confident of a break in EUR/USD 1.05 (which would drag money into the euro) but will be watching. EUR/GBP is currently failing to break lower, which may mean GBP short covering is all but complete, though sentiment is bad enough to prove sterling with more support than it deserves. The rest of the week will see attention on Friday’s labor market data in the US and Canada, month-end, and football. © Sociéte Genérale
The USDJPY has been falling along with yield curves and oil. The yen is clearly strengthening as the drag effect of monetary policy and the energy crisis wains. But it could also be the canary in the coal mine that reflects the market's mood around China and the disruptions happening there. The yen is a safe haven currency and usually, the yen is the indicator that not all is well in the world. Though the US dollar has been the ultimate safe haven due to the rate differentials. The market is trying to tell us something.
The EURJPY is about to follow the USDJPY and this means we could potentially have a trend trade about to start.
The USDJPY has been falling along with yield curves and oil. The yen is clearly strengthening as the drag effect of monetary policy and the energy crisis wains. But it could also be the canary in the coal mine that reflects the market's mood around China and the disruptions happening there. The yen is a safe haven currency and usually, the yen is the indicator that not all is well in the world. Though the US dollar has been the ultimate safe haven due to the rate differentials. The market is trying to tell us something.
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