JPY : Forecast
(Fri, 24 July 2020). USD/JPY price action may be on the cusp of another leg lower as Treasury yields break down. AUD/JPY aims for fresh 2020 highs with the Aussie-Yen buoyed by upbeat market sentiment. CAD/JPY could gain ground with crude oil prices attempting to push higher. The Japanese Yen has traded sideways in wide range over the last several weeks judging by the JXY Index. On the surface, this appears owed to a recent consolidation in spot USD/JPY even as the US Dollar implodes. Looking beyond USD/JPY performance, however, a narrative underscoring broader Japanese Yen weakness emerges.
This largely follows sustained selling pressure across safe-haven currencies, like the Yen, as investor sentiment and risk appetite continue to improve. That said, what might steer the direction of JPY price action going forward?
USD/JPY PRICE CHART: TRACKING TEN YEAR TREASURY YIELD SPREAD OVER JAPANESE GOVERNMENT BONDS
USD/JPY has drifted horizontally within a 3.5% trading range since the beginning of April. The interest rate sensitive Dollar-Yen has faced bearish headwinds more recently as spot prices edge back toward monthly lows notched in May and June. Perhaps the 10-year yield spread between US Treasuries and Japanese Government Bonds serves as one possible driver steering USD/JPY price action lower.
Assuming this direct relationship is maintained, it looks like there is potential for the Japanese Yen to gain ground against the US Dollar. This is considering the latest drop in the 10-Year Treasury yield below 60-basis points, which helped the yield spread between USTs and JBGs decline.
AUD/JPY PRICE CHART: AUSSIE-YEN MIRRORING VIX INDEX ‘FEAR-GAUGE’
After surging an eye-popping 27% off the coronavirus bottom, the Aussie-Yen is currently pressing fresh 2020 highs around the 76.500-price level and is now positive year-to-date. The incredible v-shaped recovery staged by sentiment-linked AUD/JPY since the mid-March trough looks underpinned by a sharp improvement in risk appetite. This is highlighted by the strong negative correlation that AUD/JPY price action tends to hold with the S&P 500 VIX Index.
Correspondingly, the Japanese Yen might remain under pressure with the VIX ‘fear-gauge’ sinking toward pre-pandemic levels as investors continue to discount, and seemingly ignore, several fundamental threats still faced by the global economy. That said, an abrupt return of risk aversion likely stands to send the VIX Index snapping higher and could be mirrored by the Aussie-Yen pivoting lower.
CAD/JPY PRICE CHART: CANADIAN DOLLAR EDGING HIGHER AGAINST YEN AS CRUDE OIL CLIMBS
In addition to the VIX Index, the direction of crude oil might serve as another quantitative bellwether with potential of signaling where the Japanese Yen might head next. This is particularly the case for CAD/JPY price action as the Loonie eyes oil while the Yen responds to fluctuations in risk appetite fueled by changes in expectations for global GDP growth.
Upward momentum enjoyed by crude oil prices likely indicates that market participants remain confident about prospects for economic growth and oil demand. If this advance is sustained, it is possible that CAD/JPY may continue climbing as well. Conversely, the Japanese Yen could attempt to claw back gains forfeited back to the Canadian Dollar if crude oil slumps.
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