Risk appetite and Yen, things to consider when trading JPY:
- Risk appetite of the market
- U.S. Yields
- US Stocks
All above bullet point is related and moving the Yen as safe heaven currency. So let’s break it down.
Risk appetite of the market
Risk appetite of the market is the eagerness of investors to take on financial risk in prospect of potential gaining a profit. Which mean risk tolerance or how willing the investor to bet in asset classes on the current financial condition of the market. Sometime we see this in the form of fear and greed index. The source of this risk appetite is on how the investors digest things like the macro economic data, monetary action and statement of central banks, geopolitical situations and other factors.
The optimistic mode of the market when we see things such as good economic outlook, accommodative central bank forward guidance or policy, stable geopolitical situation, etc. The investors feels that strong support of good fundamentals contain less risk to bet.
The pessimistic mode of the market. Could be triggered as we see things moving to the opposite of what’s described on the Risk on. In this case there is strong probability that investors move the money into the safe heaven.
Per definition is the effective annual interest rate that the U.S. government pays on one of its debt obligations, expressed as a percentage. The annual return investors can expect from holding a U.S. government security with a given maturity. It is important to track the U.S. Yield since we can see the perfect correlation for example in USDJPY and US 10Y:
When the top class asset such as U.S. Stocks rising, it’s also weakening the demand for safe heaven. This is the correlation between USDJPY and DOW.
So, what happen there? we dont see some correction yet on USDJPY while DOW is on correction? The answer is, USD is more sexy as the yields going up on the aggressive tightening policies of the Fed. The other factor is BoJ also keep reiterating that they will continue the easing mode of monetary policies in contrast to the Fed.
Where is JPY in general heading?
Now it’s depend on how the forward guidance will be delivered, this week will on Jackson Hole. Within this two week we see all the Fed members reiterating the hawkish tone. If the market see the sign of pivot from Jerome Powell in Jackson hole, this could be a big reversal in JPY, especially USDJPY.
Here we see the inverse correlation between U.S. Interest rate and JPY index:
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