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Yen Looks Attractive on Italian Election, US Jobs Data and More

Yen Looks Attractive on Italian Election, US Jobs Data and More

Daniel Dubrovsky, Contributing Senior Strategist


Japanese Yen Fundamental Forecast: Bullish

Talking Points:

  • Japanese Yen appreciated as Fed rate hike bets, US tariff proposals spooked the markets
  • BoJ is due, but more continuity seems likely. Attention turns to external event risk instead
  • Italian election, US NFPs & possible tariff retaliation threats may boost the anti-risk unit

Just started trading USD/JPY? Check out our beginners’ FX markets guide !

The Japanese Yen was a relatively strong performer last week in the foreign exchange market. Unfortunately the same cannot be said about economic data performance from home. Local retail sales and industrial production growth all slowed down. Then, Finance Minister Taro Aso noted that there is a “labor shortage” after the unemployment rate dipped to about a 25-year low.

Rather, developments on the external fronthelped the Yen. Fed rate hike expectations swelled as Jerome Powell testified before Congress on Tuesday. A couple of days later, US President Donald Trump announced that he will impose import tariffs on steel and aluminum at 25% and 10% respectively. Both these events sent stocks deeper into the red, which boosted the anti-risk currency.

Next week brings a plethora of event risk for the Japanese Yen. At home, the final fourth quarter 2017 GDP readings are expected to rise from preliminary estimates. However, the top-tier one will be March’s Bank of Japan monetary policy announcement. More continuity seems like the probable outcome there, especially given that the recently reappointed Governor Haruhiko Kuroda spent his time last week arguing that they need to “continue monetary easing persistently”.

Interestingly, towards the end of last week, things heated up as Mr. Kuroda mentioned that the “BoJ will be considering exit around fiscal 2019”. He added that “there could be a policy change before 2% is achieved”. Traders will no doubt be looking for any further clarification or details about this at their March 9th interest rate decision.

More crucial event risk for the currency seems to reside outside of the borders of Japan though. Over the weekend, the Italian election stands in the way as the most immediate source. While the eurosceptic Five Star Movement appears to be in the lead according to the latest poll, a hung parliament is still the projected outcome. However, the number of undecided voters could make for some surprises. If sentiment turns sour in the aftermath, the anti-risk currency could benefit.

On Friday, we will get February’s US employment report. The last one sparked an aggressive wave of risk aversion on inflation fears as hourly earnings rose to the highest since 2009. Economists are calling for wage growth to stay the same as the unemployment rate drops further to 4.0%. A better-than-expected outcome here could further bolster Fed rate hike expectations, sending Wall Street lower once again.

Finally, the threat of more retaliatory responses to Trump’s tariff proposals could ignite more selling pressure in stocks, benefiting the Yen. In the hours following his announcement, the EU said that it will “react firmly to Trump’s tariff” and that it will “bring forward countermeasures versus US tariffs”. Nikkei 225 futures did not fare well amidst these developments. We will see how Japan reacts to this in the coming days and weeks. Toyota has already announced that prices of cars and trucks sold in America will rise.

With that in mind, the combination of political and economic risk makes for what could be a volatile week ahead. From this perspective, the anti-risk Japanese Yen seems like an attractive bid in case sentiment turns south. The fundamental forecast will have to be bullish.

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