What Are Analysts Saying About The GBP/JPY Pair?

The Sterling Remains the Weakest G10 Currency of the Year….

The GBP/JPY currency pair is trading at 130.424, up 0.24% or 0.322 Japanese yen. The Dragon as it is otherwise known, has a year-to-date performance of -26.44%. It started 2016 at 177.2852 and has plunged sharply in 9 months. Its steepest decline took place on June 23, 2016 when it was trading at 154.7711 and dropped to 134.7486 on 28 June. Consolidation has taken place with this currency pair in the past 3 months, with losses of just 3.13% recorded. Over the past 1 month, the GBP weakened by 2.46% against the JPY. Over the past 5 trading days, a decline of 1.30% has taken place with this pair.

Currency Traders Point to the Resilience of the JPY

It should be pointed out that the Dragon is facing renewed pressure as the GBP comes up against a resurgence of Brexit issues. On the other side, the JPY has also shown its resilience, despite increasing risks evident in the markets. There have been several important macroeconomic decisions in recent days. These include the outcome of the 2-day conference of the Fed FOMC, the Bank of Japan interest-rate decision, and similar decisions by the Reserve Bank of New Zealand. Currency markets will remain volatile through September and early October as these decisions play out. It appears as if low interest rates will continue for several months, and this bodes well for equities markets. But currency traders are reluctant to rest on their laurels as a Fed rate hike is likely before the end of the year.

Could the GBP/JPY Currency Pair Hit its Brexit Lows Once Again?

The JPY has enjoyed an atmosphere of increasing risk sentiment. The Japanese yen may have a low yield, but it is making incremental gains against the USD, the EUR and the GBP. The EUR/JPY and GBP/JPY currency pairs appear headed towards the lows they experienced in June/July at the height of Brexit-related concerns.

The UK Treasury does not believe that the decision to leave the European Union will impact upon economic growth in the UK in 2016. In fact, economists across the board concur that in the3 months post-Brexit, the shock to the UK economy is less than what was anticipated. Now, economists are forecasting economic growth for 2016 at 1.8%, up 0.3% from forecasts in the immediate aftermath of the Brexit referendum on June 23, 2016.

This bullish sentiment for the UK economy marks a sharp reversal from the trend that has been evident between January and July 2016. The Treasury believes that the UK economy is resilient, and this perception is shared by leading economists too. Growth forecasts for 2017 are modestly higher than they were in June/July, but nobody is willing to get too far ahead of themselves. The perception that the UK economy may be in a ‘honeymoon period’ has not been lost on those pouring over the data.

Nonetheless, this does not mean that the UK economy and the GBP will deteriorate substantially once the impact of a Brexit decision begins to filter through to Main Street. The net effect of Brexit stress should have a limited impact on UK households and a steadily increasing export market. The BOE may decide to cut interest rates further, thereby stimulating economic growth. Fiscal expenditure will help boost overall economic activity, and reduce the economic slowdown in 2017.

What about the Japanese Economy?

The Japanese economy is in a unique position with an ROA (return on assets) of approximately 3.1% and cost of capital at 2.9%. In the Eurozone for example the cost of capital is 2.4% while the return on assets is just 2.2%. This indicates tremendous strength in the world’s #3 biggest economy. Another important economic indicator in Japan is the equity/total assets ratio which is now 39.2%, as opposed to the Eurozone’s 29.6%.

More importantly, the political risk factor in Japan is virtually non-existent, and this lends itself to increased profitability. If we look at the relative affordability of Japanese equities, they are 20% cheaper than their European counterparts. The Japanese currency could tilt either way against the greenback, and this could be beneficial or detrimental to exporters. Export-oriented business sectors could benefit if inflation expectations increase, thereby driving down real yields.

Overall, we can expect sterling weakness to continue and yen strength to consolidate.