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Jane Foley, senior FX strategist, suggests that the re-escalation of trade tensions between the US and China has resulted in the safe haven JPY being the best performing G10 currency in both a 5 and a 1 day view.

Key Quotes

“Adding to support for the JPY over the past week or so has been an increase in geopolitical tensions surrounding Iran. The better tone of the JPY comes at a time when worries over the health of the Japanese economy are rising.”

“Weaker Chinese growth has hit Japanese exports and the country’s coincident index has pointed to a worsening of conditions for the first time in more than six years.   This comes at a particularly sensitive time for the Japanese economy given the planned hike to consumption tax in October.”

“The threat to the Japanese economy would rise further if the value of the CNY were to fall.   Since demand for safe haven could exaggerate any gains in the JPY, Japanese exporters could find themselves particularly disadvantaged in these circumstances.   We expect USD/JPY to be trading in the region of 108 on a 12 month view.”

“Although the expectations of lower interest rates for longer from the Federal Reserve has muted the market’s reaction to predictions of slower growth from forecasters such as the OCED and the IMF this year, investors would likely take fright if the CNY adjusted down.”

“In these circumstances, flows out of emerging markets would likely benefit the USD, which we anticipate is set to stay firm against a broad bundle of currencies in the coming months.   However, the increased stress levels in the market could see the JPY outperforming.   We expect EUR/JPY to be trading around 121 on a 6 month view.”