USD/JPY recovery stalls below 143.00, despite the brighter market mood
- US Dollar posts a mild rebound on risk appetite but remains capped below 143.00.
- Concerns about US fiscal recklessness are weighing on all US assets.
- The Yen trims losses ahead of Ueda’s press conference, due on Tuesday.
The positive impact of the de-escalation of Trump’s latest trade rift with the European Union has had a limited positive impact on the US Dollar. The USD/JPY is failing to find buyers above a previous support, now turned resistance, at the 143.00 area.
Trump calmed fears over the weekend as he announced a pause on the 50% tariffs on all EU imports announced on Friday. This news has boosted demand for risk assets, weighing on safe havens like the Yen. The US Dollar, nevertheless, seems unable to put a significant distance from Friday’s low, at 142.35.
US debt fears are weighing on US Dollar’s recovery
Investors are taking a cautious approach to all US assets. Last week, Moody’s downgraded the US debt rating amid growing concerns that Trump’s sweeping tax bill will inflate an already high US deficit, in times of softer economic growth.
The tax bill, which cleared the House of Representatives last week and will be debated in the Senate during the coming weeks, is expected to increase US debt by about $3.8 trillion over the next 10 years. This undermined confidence in US Treasury bonds and the US Dollar last week.
Trading vvol¡ume is thin today, with US markets closed on a bank holiday. In Japan, the focus will be on BoJ Governour Ueda’s speech on Tuesday and Thursday’s Tokyo CPI numbers. In the US, the Fed Minutes, on Wednesday, and US PCE Inflation on Friday will be the highlights of the week.
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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