As market risk rises, the yen could make a comeback

As risk appetite in the financial markets shrank further early on Thursday due to a combination of current and future risk factors, safe havens initially received a significant boost – most notably, the Japanese yen.

As risk appetite in the financial markets shrank further early on Thursday due to a combination of current and future risk factors, safe havens initially received a significant boost – most notably, the Japanese yen.

Overnight, weak China trade data for September showed a much worse-than-expected trade balance of 278 billion yuan against expectations of 365 billion yuan (the prior month was 346 billion yuan). This large deviation from expectations prompted equity markets around the world to fall sharply in the morning, boosting the safe haven yen as serious questions about China’s economic growth emerged.

Also weighing on markets have been increasing expectations of a Fed rate hike this year. Wednesday’s minutes from September’s FOMC meeting showed that a divided Fed still had concerns about jobs and inflation, but that it looks to be getting increasingly closer to raising rates, especially in light of the fact that several Fed members warned that further delays in raising rates could be risky, potentially leading the economy into recession.

Shaky crude oil prices also continue to contribute to lower risk appetite, as questions about OPEC production cuts remain. Additionally, crude prices were pressured further by reports on Wednesday of OPEC oil production that hit an eight-year high in September. On Thursday, the US Energy Information Administration reported that US crude oil inventories rose by 4.9 million barrels against prior forecasts of only a 0.4-million-barrel build.

Further unsettling markets, particularly in the US, have been the onset of company earnings season as well as the ever-increasing specter of the November US presidential elections. The latest development to haunt the Trump campaign has been the emergence of accusations against Donald Trump for allegedly making unwanted advances against women in the past. This has just been one more problem in a long series of negatives weighing on the campaign. With that said, however, Trump still has a chance within the next few weeks to catch up to Hillary Clinton, especially since further negative attacks have also continued to hit her campaign. Therefore, risk and uncertainty in the markets could still expand due to new developments in the unfolding US election process. 

With all of these risk factors potentially threatening the markets, the safe haven Japanese yen, which has been in retreat mode for the past couple of weeks, could make a comeback. Against the strong US dollar, the yen has not fared well since late September, when USD/JPY rebounded off the key 100.00 level on an increase in risk appetite. USD/JPY then went on to break out above an important downtrend line, and then subsequently broke out above 103.00. With any return of a risk-off market environment, which is likely to occur with the upcoming risk events mentioned, the yen could begin strengthening once again, potentially pushing USD/JPY back down towards the major 100.00 support target once again.

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