JPY Q2 2021 Fundamental Forecast

Yen, Money, Wealth, Japanese Yen

JAPANESE YEN FIRST QUARTER RECAP – DOMINANT DOWNTREND ACCELERATED

As anticipated, the Japanese Yen started off the new year on a sour note. Taking a look at a majors-based index on the chart below, JPY weakened as much as 6 percent before cautiously stabilizing towards the tail end of March. The anti-risk currency remained fairly depressed despite some emergence of global stock market volatility, especially from the technology sector. This could spell some trouble for the Yen as traders further settle into 2021.

MAJORS-BASED JAPANESE YEN INDEX VERSUS WALL STREET INDEX

JPY Q2 2021 Fundamental Forecast

*Correlation does not imply causation.Source: TradingView

THE YEN’S RELATIVELY DISMAL YIELD AND WHY IT MATTERS

A growing theme from the first quarter has been rising global growth and inflation expectations. Fairly swift vaccination rollouts in the United States, as well as President Joe Biden’s US$1.9 trillion Covid relief package, have been driving up longer-term Treasury yields. The markets are slowly pricing in that the Federal Reserve could begin hiking rates sooner than expected. Fed Funds Futures indicate that there is about a 60% chance of a hike by the end of 2022.

Meanwhile, the Bank of Japan seems more likely to keep its loose monetary policy taps open for longer. Benchmark lending rates in Japan have been negative for some time due to a persistent struggle of trying to bring up stubbornly low inflation. The central bank did announce in March that it would implement a yield range target of about 25 basis points on either side of the 10-year yield mark of 0.0%. As such, JPY will likely be vulnerable to rising external bond yields, remaining a key funding currency for the carry trade.

SECOND QUARTER RISKS – TREASURY YIELDS, VACCINE HICCUPS, ROTATION TRADE, WEAK CORE CPI

While central banks such as the RBA and ECB have taken a more prominent stance against rising longer-term bond yields, the Fed appears to be relatively more sanguine. Chair Jerome Powell expressed little concern about them in March, perhaps leaving the door open for yields to continue climbing alongside growth expectations. That may leave the Japanese Yen vulnerable as traders chase returns outside of the island-nation economy. However, that doesn’t mean that it is all clear for the Yen to resume its downward trajectory.

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