USD/JPY hits seven-month lows near 142.00 as the sell-off extends
- USD/JPY drops to its lowest in seven months before recovering some ground.
- Flight to safety remains in vogue, lifting the Japanese Yen while the US Dollar crashes on growth concerns.
- US-China trade war escalates with Chinese responding with a tariff hike to 125% on US goods.
USD/JPY extends its losing momentum into the fourth consecutive day in European trading on Friday, having recorded its lowest level in seven months just above 142.07.
USD/JPY faces a double-whammy
Despite the quick rebound, risks remain skewed to the downside for the USD/JPY pair, as it continues to face headwinds from a relentless US Dollar (USD) sell-off and a massive surge in the haven demand for the Japanese Yen (JPY).
Risk-off flows remain in full swing this Friday, accentuated by the latest retaliation by China. Beijing announced on Friday that it would raise tariffs on US goods from 84% to 125%, responding to President Donald Trump's increase of tariffs on Chinese imports to 145%.
The intensifying US-China trade war rattled markets again, fuelling safe-haven flows into the JPY. Meanwhile, the USD remains under heavy selling pressure as investors fret the negative impact of the trade war on the US economic growth prospects, which could propel the US Federal Reserve (Fed) to opt for aggressive interest rate cuts.
Moreover, the pair remains undermined by the diverging monetary policy expectations between the Fed and the Bank of Japan (BoJ).
Looking ahead, traders will take some cues from the US Producer Price Index (PPI) data for March and the University of Michigan (UoM) preliminary Consumer Sentiment Index data for April. However, the US-China trade war updates will remain the main market driver.
Separately, Japanese Economy Minister Ryosei Akazawa noted that they will hold tariff negotiations with the US on April 17.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
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