Japanese Yen Outperforms and Could Grow Stronger for Longer

• JPY stands tall amid fears for Eurozone economies
• As virus restrictions stoke demand for safe-havens
• Pulling JPY back from brink of breakdown on charts

Image © Adobe Stock

The Japanese Yen towered over all major currencies including the Dollar and Pound ahead of the weekend as international capital sought the refuge of safe-haven assets, extending a run of outperformance that might have scope to continue over the coming week.

Japan’s Yen advanced more than half a percent against even other safe-haven currencies like the U.S. Dollar and Swiss Franc on Friday as investors reacted to the creeping spread of increasingly extreme attempts to head off another rise in coronavirus infections on the European continent.

Austria announced on Friday that it would return to an all-out ‘lockdown’ and said it would attempt to make vaccination a legal requirement less than a week after attempting to impose a national lockup on only those residents who’d not taken up the offer of vaccination.

This is only the latest European country to reimpose restrictions after the Netherlands and Czech Slovakia announced differing responses during recent days, and it may not be the last either given ongoing speculation that Germany could also opt for something similar over the coming weeks.

“With Covid cases turning upwards across the likes of Germany, France, and Portugal, there is a fear that today’s announcement is indicative of where other European nations could find themselves in 2-3 weeks' time,” notes Joshua Mahoney, a senior analyst at retail trading firm IG.

Above: USD/JPY, GBP/JPY and EUR/JPY at 4-hour intervals.

• Reference rates at publication:
  GBP to JPY \ USD to JPY
• Spot: 153.41 \ 114.05
• High street bank rates (indicative): 149.12 \ 110.86
• Payment specialist rates (indicative: 152.64 \ 113.48
• Find out about specialist rates, here
• Or, set up an exchange rate alert, here

Fresh restrictions on business activity and social contact place the European economic recovery in jeopardy and were instrumental Friday in pushing the European single currency to new 2021 lows against the Dollar and Pound.

However, it was the Japanese Yen that made the largest gains on Friday and which could potentially have the greatest scope to advance further if investors continue to eschew exposure to riskier assets.

“The Yen is fast becoming the go to risk aversion currency of choice, taking over the mantra from the usd. Throughout much of the pandemic USD was deemed as the go to risk aversion currency in fx. Not anymore,” says Neil Jones, head of FX sales for financial institutions at Mizuho Bank in London.

“For 2022 we look for yen to take over from usd & operate as the most effective barometer to hedge or unhedge risks. $Y just dropped near 50 points on Euro lock down latest, speaks volumes,” Jones wrote in a note to clients on Friday.

The Yen was sold heavily throughout 2021, leading it to fall more than 10% against the U.S. Dollar and other currencies owing to a range of domestic and international factors including the super low level of Japanese interest rates and government bond yields.

Low rates make the Yen cheap to borrow which is why investors use Yen borrowings to fund bets on higher yielding and often riskier currencies, but these wagers are often reversed in times of risk aversion.

Reversing such wagers tends to see Japanese exchange rates strengthen as was the case on Friday.

While concerns about the European economic outlook are unlikely to dissipate any time soon, there are other factors that could also potentially encourage a further recovery of the Japanese Yen over the coming week including a White House decision on the leadership of the Federal Reserve.

“I think the market wants to be long USDJPY as rates continue to move higher, but is scared that Brainard could be nominated. If Powell is nominated, the market will buy USDJPY,” says Brent Donnelly, president of Spectra Markets and a veteran currency trader.

The White House is expected to announce its nomination for the role of the Federal Reserve chairperson over the weekend and there is some chance the administration could elect to nominate a new candidate to replace the incumbent Jerome Powell.

Above: USD/JPY chart with technical indicators and analysis. Source: RBC Capital Markets.

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“A Brainard nomination is bad for stocks. Sell any knee jerk rally. Brainard, with her climate and inclusion focus, and dovish lean, is the wrong person for the Fed job when an inflation fighter is needed,” says Brent Donnelly, president of Spectra Markets and a veteran currency trader.

Speculation suggests the number one alternative contender for the Fed Chair nomination, Federal Reserve Board Governor Lael Brainard, is more closely aligned with the White House administration from an ideological perspective.

It’s possible, if not likely, that any White House decision to nominate a new Fed Chair this weekend would lead investors and traders to rethink the market’s assumption that the Fed could be likely to begin lifting interest rates from around the middle of next year.

That assumption has been instrumental in lifting the U.S. Dollar and pushing the Japanese Yen lower during recent months so any doubts about the merits of it would potentially fuel and extend this week’s corrective rebound in Japanese exchange rates.

“Pullbacks to the 112.23/73 support zone are viewed as a buying opportunity, with the trendline @ 110.53 serving as the pivot for the broader uptrend, says George Davis, chief technical strategist at RBC Capital Markets, referring to USD/JPY.

Above: USD/JPY, GBP/JPY and EUR/JPY at daily intervals.