Analysts at MUFG Bank point out that risk will continue to be the key driver of the Japanese yen. They argue USD/JPY has closed above its 200-day moving for the first time since the end of April, opening the door to further gains towards 110.00.
“We assume risk-on type trading conditions will persist. That points to further yen depreciation. Since 8th October, the yen has weakened by around 2.0% versus the dollar and even more versus many non-dollar currencies but we see scope for this to be maintained into next week. There certainly looks to be scope for increased speculative yen selling. The leveraged yen positioning to Tuesday of last week was still modestly long yen – while yen depreciation since suggests yen short positions now, the scale of positioning remains modest. Secondly, weekly flow data from Japan indicates a notable pickup in Japan equity purchases by foreign investors. Purchases have totalled JPY 2,100bn in the last four weeks – down from JPY 2,752bn last week, the largest since April, which coincided with USD/JPY highs for 2019. If risk-on persists through next week, we see scope for a retest of the 110.00 level, especially given the breach of 109.32 – the Aug high.”
“The key for determining near-term direction of the yen is of course whether the risk on rally extends into next week. Good news over a possible trade deal is certainly now in the price but we don’t see disappointment coming and momentum points to some further yen selling ahead. Our USD/JPY yield based regression model suggests to us that yield is not a reliable influence in determining short-term direction.”
“A yield influence event next week for USD/JPY would be the testimony by Fed Chair Powell to the Joint Economic Committee but we doubt this testimony will be a notable market mover given it is unlikely to differ hugely from Powell’s recent FOMC press conference on 30th October. Hence, broader risk appetite and financial market conditions will be the key near-term influence.”