By FXEmpire.com
Last evening the, USD/JPY basically hovered in a rather tight range around the 79.50 pivot. However, underlying sentiment wasn’t that bad. The yen lost some ground in Asia as the IMF indicated that the yen was moderately overvalued. Interventions were also seen as a tool to ease volatility. The pair reached an intraday top in the 79.70 area early in Europe. From there a moderate correction kicked in. During the day, core bond yields trended cautiously higher.
However, it took until the rally in US equities started before USD/JPY was able to profit. USD/JPY closed the session at 79.53 compared to 79.44 on Monday evening.
This morning, sentiment on risk in Asia isn’t that bad, but the risk rally has no strong enough momentum to push USD/JPY beyond the recent highs at 79.70/83.We look out whether a rise in core bond yields might continue to support USD/JPY.
Investor demand for the JPY will be short-lived due to its weakening sovereign debt profile – which triggered a rating downgrade – and official intervention risk. The CNY and the INR adopted a weakening bias which spilled over to the rest of the Asian floating-currency group. The AUD is reacting negatively to commodity price shifts, a dampened global growth outlook and additional monetary easing.
The Asian region offers a mixed outlook. While the Japanese yen (JPY) has resumed its appreciating bias, the regional BRIC currencies
, the Chinese renminbi (CNY) and the Indian rupee (INR), adopted a defensive bias in this heightened financial market environment. The JPY regained its status as a perceived safe-haven currency and extended its appreciating tone since mid-March.
The Japanese yen (JPY) continues to be perceived as a safe-haven currency in times of synchronized global financial stress. Since mid-March the yen has been appreciating against both the USD and the EUR in the context of deepening tensions in Europe caused by uncertainties regarding currency union sustainability and systemic erosion in the Spanish financial sector. We do foresee that the perceived safety premium will remain in place over the next quarter, yet the risk of decisive outright intervention by the Japanese authorities will escalate later in the year.
However, the view that deteriorating sovereign creditworthiness and fiscal conditions (which prompted a double-notch credit rating downgrade by Fitch in late May) will weigh on Japan’s mid-term outlook.
In the short term, reacting to a rise in risk aversion, flows into yen have been strong, pushing the currency up 2% in the month of May. Traders cut their short positions and added to longs, reducing the net short position to just US$-1.7 billion. Technical’s suggest ongoing downside risk; however a drop below 77 in USDJPY will aggravate intervention rhetoric. The near-term suggest a lower USDJPY; however Japanese fundamentals are weak, which should help USDJPY recover back up to 83.00 by year-end.
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Originally posted here
