Japanese Yen remains depressed vs. USD amid Middle East tensions; lacks follow-through
- USD/JPY gains strong positive traction on Monday, though it lacks follow-through buying.
- Escalating military aggression in the Middle East underpins the USD’s reserve currency status.
- Hawkish BoJ expectations support the JPY amid intervention fears and cap gains for the pair.
The USD/JPY pair catches fresh bids at the start of a new week and climbs back closer to last week's swing high, though it lacks follow-through and remains below the 157.00 mark through the Asian session.
A coordinated US-Israel military strike on Iran marks a dramatic escalation of geopolitical tensions and unsettles global markets. Adding to this, concerns that the closure of the Strait of Hormuz – a critical maritime chokepoint – could push up oil prices and trigger a global economic downturn boost the US Dollar's (USD) status as the global reserve currency. This turns out to be a key factor acting as a tailwind for the USD/JPY pair.
Meanwhile, the global flight to safety, along with expectations that the Bank of Japan (BoJ) will stick to its policy normalization path, offers some support to the Japanese Yen (JPY). Furthermore, fears that authorities would step in to stem further JPY fall act as a headwind for the USD/JPY pair. This, in turn, warrants some caution before placing aggressive bullish bets and positioning for any further appreciation for the currency pair.
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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