By Areena Fx- The Japanese Yen attracts fresh sellers on Monday, though it lacks follow-through.
- The risk-on mood and domestic political uncertainty undermine the safe-haven JPY.
- The divergent BoJ-Fed policy expectations contribute to capping gains for USD/JPY.
The Japanese Yen (JPY) maintains its offered tone through the early European session on Monday and seems vulnerable amid a combination of negative factors. Investors now seem convinced that the Bank of Japan (BoJ) could further delay raising interest rates on the back of the domestic political uncertainty. Moreover, the risk-on impulse, triggered by President Donald Trump’s pivot on China tariffs, prompts fresh selling around the safe-haven JPY following a sharp recovery from the lowest level since February 23, touched against its American counterpart on Friday.
However, speculations that authorities could intervene to stem any further weakness in the domestic currency might hold back the JPY bears from placing aggressive bets. Meanwhile, the growing acceptance that the US Federal Reserve (Fed) will lower borrowing costs two more times this year and concerns about a prolonged US government shutdown keep the US Dollar (USD) bulls on the defensive. This contributes to capping the USD/JPY pair’s intraday positive move beyond the 152.00 mark amid thin trading volumes on the back of a bank holiday in Japan and the US.
Japanese Yen struggles amid political uncertainty, delayed BoJ rate hike bets and positive risk tone
- On Friday, US President Donald Trump threatened an additional 100% tariff on Chinese goods from November 1 in retaliation to new export controls Beijing is planning for valuable rare earth minerals. Vice President JD Vance defended Trump’s approach and warned that any aggressive Chinese response would be met with stronger US action.
- China’s Commerce Ministry responded by saying it will act to safeguard national interests if the US obstinately insists on new tariffs. The escalating rhetoric has cast uncertainty over a potential meeting between Trump and Chinese President Xi Jinping later this year, denting the global risk sentiment and boosting the safe-haven Japanese Yen.
- However, Trump sought to ease fears of a worsening trade conflict with China and posted on Truth Social that China’s economy will be fine and that the US wants to help China, not hurt it. Trump added that both countries wish to avoid economic pain, triggering a fresh wave of the global risk-on trade and undermining the JPY on Monday.
- Meanwhile, Japan’s Komeito party ended a 26-year partnership with the ruling Liberal Democratic Party (LDP), jeopardizing Sanae Takaichi’s bid to become the country’s first woman Prime Minister. This turns out to be another factor that undermines the JPY and lifts the USD/JPY pair back above the 152.00 round figure during the Asian session.
- Traders are still pricing in the possibility that the Bank of Japan will hike interest rates by the end of this year. In contrast, the US Federal Reserve is widely expected to lower borrowing costs two more times by the year-end. Furthermore, the US Dollar is seen consolidating Friday’s retracement slide and acts as a headwind for the USD/JPY pair.
- The US government shutdown began on October 1, with no end in sight yet. As a consequence of the budget freeze, Trump has already announced the first layoffs of federal employees. This is seen as another factor keeping the USD bulls on the defensive and warranting some caution before placing fresh bullish bets around the currency pair.
USD/JPY bulls await sustained strength beyond the 100-hour SMA, around 152.00 mark
From a technical perspective, the USD/JPY pair shows some resilience below the 23.6% Fibonacci retracement level of the recent surge from the monthly low amid positive oscillators on the daily chart. That said, Friday’s breakdown through the 100-hour Simple Moving Average (SMA) warrants some caution for bulls. Hence, it will be prudent to wait for a sustained move beyond the 152.20 area (100-hour SMA) before positioning for any further intraday appreciating move. Spot prices might then climb to the 152.70-152.75 intermediate hurdle and reclaim the 153.00 mark before aiming to test the eighth-month high, around the 153.25-153.30 region, touched on Friday.
On the flip side, Friday’s swing low, around the 151.15 region, could act as an immediate support. Some follow-through selling below the 151.00 round figure could drag the USD/JPY pair to the 38.2% Fibo. retracement level, around the 150.70 region. The corrective decline could extend further towards the 150.00 psychological mark. The latter also represents a confluence support – comprising the 200-hour SMA and the 50% Fibo. retracement level – and should act as a key pivotal point.
Risk sentiment FAQs
What do the terms”risk-on” and “risk-off” mean when referring to sentiment in financial markets?
In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
What are the key assets to track to understand risk sentiment dynamics?
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
Which currencies strengthen when sentiment is “risk-on”?
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
Which currencies strengthen when sentiment is “risk-off”?
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.