13 August 2014

Geopolitics springs USDJPY into action

The yen has come back to life after the conflict in Ukraine and Gaza sent investors flocking to safe-haven assets.
  • ​​​​​Ukraine airline crash sends USDJPY ​to new low of 101.18 
  • Japan's economy contracts 1.7 percent in Q2
  • Nation's pension fund to move away from JGBs and into stocks
USDJPY may finally be the currency pair once again causing excitement within the marketplace, as recent volatility in the pair has picked up. Last month, the lows of 101.18 recorded on July 17th had not been seen since February. The dip from 101.70 that day came in response to the news of the MH-17 flight crash in Eastern Europe, and thus has reminded the market that in times of geopolitical turmoil JPY has been viewed by some as a leading safe haven. 

Traders are concerned that a recent hike in Japan's sales tax could dampen consumer sentiment and derail the economic recovery in Japan. Photo: Shutterstock 

Those worldwide fundamental concerns are rife as August continues with problems in the Ukraine persisting as well as in Gaza and Iraq. Recent strength provided for USD was most notably seen in the GDP number of 4 percent on July 30th. 3.2 percent was the expected figure and has been seen by some as real proof that the US is on the right track, backed up by five months of non-farm payroll figures over 200k. As a result of the GDP release, USDJPY also posted highs on July 30th that had not been seen since April, of 102.80. 
The direction of the pair is difficult to establish with these two elements that suggest an upward trend for both currencies. It is therefore important to look at the analysis of the economy within Japan in order to gain an understanding of the factors may affect the home currency there. This week includes two data releases that markets will pay close attention to in order to attempt an understanding of a potential direction.

Sharp decline in GDP

USDJPY stood essentially unchanged after trading within a 14-pip range between 102.22 and 102.36 during Asian trading hours on Wednesday. The Japanese GDP release came in at -1.7 percent for the second quarter of this year, a touch better than the -1.8 percent expected, but far lower than the +1.5 percent seen in the first quarter of this year.

Japan recorded it's lowest level of growth since the earthquake and tsunami hit the country in 2011. Source: Bloomberg

This is the harshest decline in quarterly GDP seen since the earthquake and subsequent tsunami hit the country in 2011, and arises partly due to the controversial hike in sales tax to 8% from 5% installed recently.

The Bank of Japan (BoJ) also released minutes from its recent monetary policy meeting, indicating continued intentions to increase the monetary base in Japan and maintain economic activity and price stability. Interestingly, the annualised quarterly figure also came better than the -7.1 percent expected, at -6.8 percent.

The market may view the data and subsequent minutes as indicative of a higher probability of intervention from the central bank in Japan, and this may explain why USDJPY was subject to a small trading range after the data release early this morning. It was poor, but not as much as anticipated, and may only serve to increase support from the BoJ over the latter half of 2014.

Japan reviews pension fund allocation

The announcement recently by the Government Pension Investment Fund (GPIF) in Japan of a shift in its asset allocation to domestic stocks has buoyed economic sentiment in Japan. This is the largest pension fund in the world, controlling $1.26 trillion of Japanese public money, and the intentions, which will be formally announced in the autumn, may encourage growth of smaller businesses in Japan by funding their share price.

Meanwhile, the fund also announced intent to increase its allocation of funds away from domestic bonds, so the current indications could be taken with mixed feelings by Japanese Prime Minister Shinzō Abe and the domestic market there. In any case, the statement from the GPIF was greeted well by the ageing population in Japan, although some believe that the new portfolio allocation has a more short-term and risk-on mood.

Information regarding foreign investment in Japanese stocks and bonds is released during Asian trading on Thursday this week, and an improvement on the recent ¥897.4 billion ($8.75 billion) figure regarding Japanese stocks may be hoped for after the encouraging announcement from the domestic fund.

How will the Yen trade against the US dollar? Trade USDJPY as spot, forward and as an option today.

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Losses can exceed deposits on margin products. Please ensure you understand the risks.