Japanese Yen soars as geopolitical risks increase safe-haven flows

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12 April 2017

thomasdodds

Foreign exchange traders flocked away from risky assets and into the safety of the Japanese Yen on Tuesday, with growing geopolitical tensions in Syria and North Korea very much leading to a ‘risk off’ mode.

T
he growing possibility of military action against North Korea in response to its recent weapons test, combined with a sharp decline in equity markets, propelled the Yen to its strongest position since the middle of November yesterday. The Japanese currency ended almost one percent higher for the day against the US Dollar as stock markets around the world ended the day in the red.

The Dollar itself is now trading back around the levels from before Friday’s nonfarm payrolls data which showed unemployment in the US fell to its lowest level in a decade last month. Even some hawkish comments from Federal Reserve member John Williams yesterday afternoon failed to rescue the Dollar.

Intense selling pressure in the US currency helped lift Sterling to just shy of the physiological 1.25 level, with investors favouring the Pound after the FTSE 100 index proved one of the only major stock market indices spared from yesterday sharp equity sell-off. Tuesday’s inflation data, which confirmed consumer price growth remained above the Bank of England’s 2% target again in March, also ramped up expectations that interest rates could be raised in the UK before the end of the year.

Governor of the Bank of England Mark Carney will be making his second public appearance in a week this morning, speaking at a FinTech conference in London. Markets will look closely for any comments on monetary policy, although Carney is likely to remain tight lipped on the topic. The latest labour numbers from ONS this morning should also give us a decent idea as to the overall health of the UK economy as Prime Minister Theresa May begins Brexit negotiations.

Major currencies in detail

GBP

Sterling rose by over half a percent for the day against the US Dollar on Tuesday, well supported by the release of yesterday’s above target inflation data. While the majority at the Bank of England still deem it unnecessary to raise interest rates, we think a continuation in upward trend in price growth could force the central bank’s hand before the end of 2017.

This morning’s labour report will be the most significant economic data release out of the UK this morning. Earnings and unemployment data will be announced at 9:30 UK time, and could validate Bank of England hawkish Kristin Forbes’ decision to vote for an immediate interest rate hike at the Central Bank’s latest meeting in March should either earnings growth or unemployment surprise to the upside.

EUR

The Euro rose against a broadly weaker US Dollar on Tuesday, buoyed by the latest economic sentiment data from ZEW. The monthly index for the Eurozone rose to 26.3 from 25.6, defying expectations for a decrease.

With economic data light in the Eurozone in the next few days, attention will be firmly on the latest polls out of France ahead of the election on 23rd April. The surge in the polls of far-left candidate Jean-Luc Mélenchon has concerned some investors given Mélenchon, much like Le Pen, has pledged to hold a referendum on the country’s future within the European Union.

USD

San Francisco Fed President John Williams continued to strike a fairly hawkish tone on Tuesday, in line with our expectations that the central bank could hike interest rates as many as four times in 2017. Williams claimed that unemployment had already overshot his view of full employment, with “three to four interest rate hikes appropriate this year”.

Economic data out of the US will be limited today with export and import prices unlikely to shift the greenback. The monthly inflation data and retail sales should be much significant market movers when released during a thin liquidity trading day on Friday.