Whats driving USDJPY

Markets have been mostly in a holding pattern the past 24 hours, as long awaited resolutions to both Brexit and the U.S. - China trade deal were frustratingly pushed further down the track.

After five more Brexit votes overnight, including a vote on holding a 2^nd referendum, the only one to pass (412 votes to 202) was the one in favour of delaying the Brexit process. The delay is contingent on Parliament again voting down PM Theresa May’s withdrawal agreement on Wednesday of next week, which is then likely to trigger a request to the EU for a 3-month extension, to June 30.

Adding to frustrations, the much-anticipated meeting between President’s Xi and Trump appears to have been postponed until April after Secretary of Treasury, Steven Mnuchin stated “there’s still a lot of work to do, but we’re comfortable with where we are”. This followed United States Trade Representative Lighthizer’s comments, who delivered the following assessment at a Senate Finance Committee hearing earlier in the week “we are either going to have a good result or we are going to have a bad result before too long, but I’m not setting up a specific time frame – it is not up to me”.

Not surprisingly the S&P500 was unable to register a close above the elusive 2815/25 resistance level, however as we saw during last week’s dip to the 2726.25 low, retracements are likely to be shallow with many investors still on the side-lines following the record outflows prompted by the sell-off in the last quarter of 2018. The confirmation of a U.S. - China trade deal and a move above 2815/25 is viewed as a likely catalyst for side-lined investors to return to the market.

One market not content to wait patiently was USDJPY as it rallied back towards 112.00. On the surface a curious move given the Bank of Japan (BoJ) at today’s meeting was widely expected to make no changes, and based on a strong seasonal tendency for the Yen to rally sharply into the end of the Japanese financial year, as shown in the chart below courtesy of www.mrci.com.

Rather the driver of the USDJPY rally appears to be a renewed appetite by Japanese investors to buy foreign bonds, particularly U.S. bonds which offer a much higher yield than Japanese bonds. Given the cost of hedging the FX exposure of these purchases for Japanese investors is close to 3%, investors are choosing to remain unhedged and this is translating into upward pressure on USDJPY.

Also adding to the recent bid tone in USDJPY is that after both the Federal Reserve and the ECB adopted more dovish stances, there appears to room for the BoJ to do likewise. Notably, there are more analysts now looking for the BoJ to ease policy this year than to tighten.

Technically, there remains the potential for USDJPY to move higher as it trades within the longer-term trend channel view in the chart below. However, to really confirm that USDJPY is doing anything other than trading towards the top of its long term range, a break above the 113.70/114.70 resistance is required.

Source Tradingview. The figures stated are as of the 15^th of March 2019. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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