The JPY had an interesting year so far. Long-viewed as a safe-haven currency, it looks for direction at least when one looks at the USDJPY pair.
The USD’s weakness seen across the board recently failed to materialize against the JPY. In fact, the JPY even declined somewhat against the USD, but overall the pair keeps a balanced tone.
It comes as no surprise, for at least two reasons. First, the interest rate differential between the two currencies almost disappeared by the time the Fed slashed the rates to zero. Second, this is an election year in the United States, and the USDJPY pair usually consolidates ahead of the November outcome.
Abe Resignation Just A Regular Event
The news that Prime Minister Abe will resign due to personal health issues instantly sent the JPY higher. Abe is the one responsible for Abenomics – a set of measures he supported several years ago, destined to weaken the local currency so to make it easier for the Bank of Japan to reach the 2% inflation target – thus, to stimulate economic growth.
On the news of his resignation, the logical reaction was the JPY pairs moved South on fears Abenomics will be discontinued. That reaction lasted for about a weekend, as Abe’s successor is likely to stick to the plan and not deliver changes.
Since 2013, the Japanese equities have delivered strong returns, mostly on the back of the Bank of Japan’s monetary policy decisions. The bank bought (and still buys) equity ETFs (Exchange Traded Funds) at a blistering pace – as long as this continues, the danger of sidelining Abenomics is equal to zero.
Considering that Abe’s successor comes from the same ruling part, there is no reason to expect a change in politics. Therefore, the markets quickly reversed the initial JPY strength and, in some cases (e.g., EURJPY), even made new highs when compared to the marginal highs prior to the news release.
What moves the needle for the JPY is its performance against the USD. This is the main driver and the focus of many investors. Unless the USDJPY moves decisively, one way or the other, the JPY is likely to trade in a relatively tight range.
The election in the United States is a game-changer. No matter who wins, the JPY will react strongly. If Trump wins a second term, the U.S.-China tensions are likely to continue. If Biden wins, the expectations are that we will see a different American policy in Asia.
In either case, the JPY and, in particular, the USDJPY, are poised to move aggressively.