STO Fundemental - Yen posts surprise gains as safe haven status comes good

In terms of economic data we have a relatively quiet start to the week, but direction is creeping in from other directions, with the North Korean missile launches perhaps being most notable. There’s a degree of risk mitigation being seen as a result here with the Yen’s safe haven status providing some allure, but the benefit hasn’t carried over to gold prices. The precious metal remains some way off last Friday’s lows with the expectation of a US rate hike as soon as next week evidently winning out for now. Oil prices are also sliding, with Friday’s Baker Hughes rig count from the US showing that production is still ticking higher. We have also seen a slight wobble in terms of US treasury yields, although this revolves more around profit taking from last week’s gains rather than any wholesale shift in sentiment over the Fed’s likely course of action next week.

The Traders’ View

Our prop desk made a series of Yen-related calls running into the weekend break which are currently looking profitable. Short CHF/JPY, CAD/JPY and GBP/JPY are all in play, although lot sizes are relatively small. A short position on the DOW, sold at 21100 last Wednesday, is also worthy of note as this looks increasingly profitable.

Fundamentals – Yen posts surprise gains as safe haven status comes good

The week may be starting on a relatively muted tone but one move in particular that stands out is the decline in USD/JPY, with the dip below 114 proving rather eye-catching. Not only has North Korea fired off a salvo of missiles over the weekend – with three landing in Japan’s Exclusive Economic Zone – but there’s also the expectation that the bullish underlying tone emanating from the Federal Reserve will be further bolstered when February’s non-farm payrolls are released from the US later in the week. With little on the economic agenda out fo Japan in the near term, this could present some buying opportunities for the pair.

Underlining the muted state of affairs, the Aussie dollar temporarily lost ground against the greenback in the wake of some relatively low level Australian economic data, that on balance wasn’t all that far away from expectations. A shortfall in a private monthly inflation reading and a dip in recorded job advertisements were notable, but against the narrative we have seen from economists and the RBA in recent weeks, this really points towards other factors being in play. The North Korean missile launches do seem to be pushing a risk off mentality at least in some quarters – clearly this is a situation to watch and again given the underlying strength of the Australian economy this could present buying opportunities. The RBA declares its latest interest rate call at 3.30am GMT tomorrow, but there’s certainly no expectation of an change being seen here.

Sterling is threatening to break its recent trend, with cable having rallied off the six week lows we saw tested ahead of the weekend break. Yes there’s the overhanging expectation that the Federal Reserve will hike interest rates next week, but we also have the UK budget being announced to Parliament on Wednesday. With the immediate aftermath of the Brexit referendum verdict not having been as economically damaging as had been expected, there’s a reasonable chance that markets could be impressed with what they hear later in the week. Furthermore, with every expectation that the Chancellor will be looking to build a war-chest to ensure the UK economy can withstand the economic volatility that the Brexit process will bring about, what is currently being seen as consolidation for the Pound could prove to be the start of an altogether bigger move. Given the inflationary pressures this is expected to bring about too, comments from senior Bank of England staff this morning at 9.30am and 11.30am GMT will also be worth watching.

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.

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