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USD/JPY Gains Continuing but Risk Decoupling - Blame China?

USD/JPY Gains Continuing but Risk Decoupling - Blame China?

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- Commodities continue to struggle relative to pace of JPY weakening.

- USDOLLAR Index clears daily 34-EMA for first time since March 1.

- Higher volatility in FX markets should have implications for your trading strategies.

There have been some interesting developments in global financial markets the past few days, and it already seems that previously reliable relationships are evolving. Notably, the relationship between "risk" and the Japanese Yen.

While the Japanese Yen has been weakening rapidly over the past week, there has been a noticeable lack of enthusiasm in "risk assets" - the higher yielding currencies, equity markets, and commodities. Some might say this has to do with the divergent nature of recent commentary from central bank policymakers: Fed officials are talking up the possibility of a June hike (thereby reducing global liquidity) despite the market pricing in less than a 10% chance of such an event transpiring (per Fed funds futures contracts).

Keeping an eye on commodities and the antipodean currencies, it feels as if there is some growing concern about China creeping into the picture. This gut feeling may be more than a hunch.

In her daily Chinese market news wrap up published yesterday, DailyFX Currency Analyst Renee Mu pointed out an interesting article in China's People's Daily - the official paper of the ruling Communist Party - a de facto media mouthpiece for government policy machinations. The article in People's Daily noted how economists and officials were envisioning an "L" shaped recovery to growth (decline for a period then reach equilibrium) rather than a "U" or a "V" shaped recovery (declines followed by a accelerated rebounds, respectively).

The main reason why? Officials are content with the pace of growth and believe that China cannot and does not need to use persistent stimulus to promote the economy as it will cause price bubbles. This may be an issue for markets and explain the lack of enthusiasm in risk assets over the past few days (particularly commodities and equities). In homo sapiens terms (rather than the central bank talk aimed at the fictional homo economicus), this means that the PBOC will be less inclined to provide cheap liquidity to markets going forward. The PBOC has been a major provider of liquidity over the past few years (even eclipsing the Fed), and any sign that policy is shifting from "easier" to "neutral" could temper risk over the coming months.

See the above video for technical considerations in EUR/USD, USD/JPY, Gold, Silver, Crude Oil, the US S&P500, and the USDOLLAR Index.

Read more: Risk Rebound Contingent on USD/JPY Rally Continuing

If you haven't yet, read the Q2'16 Euro Forecast, "EUR/USD Stuck in No-Man’s Land Headed into Q2’16; Don’t Discount ’Brexit’," as well as the rest of all of DailyFX's Q2'16 quarterly forecasts.

--- Written by Christopher Vecchio, Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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