Japanese Yen Weakness Against Crude Oil Could Provide Opportunities.
Japanese Yen, Crude Oil, USD/JPY, US Dollar - Talking Points
- The Japanese Yen has not seen inflows despite heightened risks
- Crude oil has strengthened at the same time the US Dollar has lifted
- What does higher WTI oil mean for energy dependent Japan?
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The Japanese Yen has generally been deteriorating in value of late against the US Dollar, but it has been less vulnerable against other currency pairs.
Incredibly, since January last year, the Yen has depreciated by 50% against oil, or oil has appreciated by 100% against the Yen (depending on your view from Siegel’s paradox).
In any case, WTI oil priced in JPY has gone from JPY 5500 in January last year to a high over JPY 11000 last week. It is sometimes referred to as CL1/JPY. It is calculated in the same way that cross currency rates are calculated.
The new Japanese Prime Minister Fumio Kishida brought in high expectations of re-invigorated stimulus measures to get the nation back on track.
He has delivered on some aspects, but the key perspective has been the acceptance of a lower Yen by the government, the Ministry of Finance (MoF) and by extension, the Bank of Japan (BoJ).
The aim is to improve the prospects for exporters while inhibiting domestic spending on imports. A problem for Japan is that it relies on importing most of its energy needs.
To other nations, the downside for such a strategy in the current environment, is that this can lead to imported inflation. But for Japan, they would welcome such an outcome!
The so called ‘lost decades’ is an article for another time, but needless to say, Japan has been unable to experience price pressures like most of the world since the early 1990’s.
Today, the US Dollar is strengthening on the back of a Fed that is soon to begin tightening monetary policy beyond quantitatively and concerns around the situation in the Ukraine.
The latter is most significant because in times of uncertainty, the Japanese Yen has typically seen bouts of appreciation as Japanese investors repatriate their allocations. This has not occurred in the last few weeks.
This unusual behaviour could be saying something about the underlying structural weakness for Yen.
On the other hand, crude oil has been on the march higher due to a number of factors. Most notably from a pick-up in post pandemic demand globally and the inability of suppliers to deliver more product.
In the near term, the northern hemisphere winter may have a hand in squeezing energy prices further, but it won’t be long before spring alleviates this risk.
The situation on the Ukrainian border remains uncertain, although each day seems to reveal more brinkmanship than desire to go to war on all sides.
It appears that in the near term, CL1/JPY could see more appreciation, but if the situation unfolds where risks around oil supply are alleviated, a sharp pullback might be an opportunity.
For now, CL1/JPY* remains in an ascending channel. However, should a reversal take hold, high volatility is possible and momentum could unfold.
*To trade CL1/JPY on most trading platforms, it requires 2 underlying trades to be taken. These 2 trades are known as legs. It is easiest to trade in US Dollar amounts on both legs. To buy CL1/JPY, the first leg is to buy CL1/USD in a US Dollar amount, then buy USD/JPY in the same US Dollar amount for the second leg. To sell CL1/JPYthe first leg is to sell CL1/USD in a US Dollar amount, then sell USD/JPY in the same US Dollar amount for the second leg.
WTI Crude Oil against JPY Technical Analysis.
The weekly chart of crude oil priced in Japanese Yen illustrates an ascending trend channel that started at the end of last year.
Support could be at the previous lows of 9922.62 and 9293.19. The latter is also currently intersecting with an ascending trend line and a breach might question the ascending trend.
On the topside, the high last week of 11091 was just below the September 2013 peak of 11094.91. This level may still offer resistance. A breach above this level could indicate a continuation of the ascending trend channel.
The high prior to September 2013, is at 15802 from July 2008.
--- Written by Daniel McCarthy, Strategist for DailyFX.com
To contact Daniel, use the comments section below or @DanMcCathyFX on Twitter
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.