This past Friday the market finally broke from momentum after a strong surge in risk appetite through much of the week. However,this stall cannot be called a reversal, at least not yet. When we have analyzed the overall sentiment in the market, it has been found by us that the benchmark Dow is just off 10-month highs, for the current a new low has been set up by dollar and we can see that money-market funds are at their lowest levels since late October of last year .
Still all of the above mentioned signs are pointing towards a healthy appetite for yield with relatively little concern for market disruptions. However, when compared to the fresh highs these assets reach with each week the fundamental quality of this rally looks more and more bleak . A question may arise that how far can this divergence extend? Now that depends on how stable risk appetite is?
There is only a little doubt that a demand for capital returns is leading the markets towards higher positions. We can see yields are still brushing recent historical lows for those assets that are considered low-risk or risk-free.
Correlation between the Japanese currency and risk appetite
Another consideration for yen traders by which enough attention has not been received is the unwavering correlation between the Japanese currency and risk appetite. By the Japanese yen its status has been retained as the primary safe haven currency among the majors and that is due to the abundance of funds in the country. It is also due to a forecast for interest rates that is just being held near zero for far longer than other countries that are right now just waiting for inflation to perk up and growth to stabilize a little more.
In the background, though, a hard struggle is required for Japanese economy to recover from its record recession and there can be a long-lasting damage to its already weak financial markets. Already, we can see that despite the fact that equity benchmarks are climbing higher, many of the yen crosses are still carving congestion well off recent highs.
The yen’s link to risk for USDJPY
For USDJPY the yen’s link to risk is particularly important. Through the worst of the financial crisis the dollar was considered a safe haven due to the liquidity and securities of US Treasuries – and yet, the yen has got success in maintaining its negative correlation to risk trends even against the greenback. It is unusual then that over the past four weeks, when risk appetite has invariably risen, USDJPY has steadily plunged nearly 800 points.
Long-term risk appetite, policy views and interest rate forecasts all these favor the dollar over time. But, at the same time, the benchmark three-month US Libor rate is at its lowest level that has been recorded and subsequently it is at a discount to its Japanese counterpart.
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Posted by R. MAK. in Currency Rates, Currency Trade, Forex Basics, Forex Market, Forex News, Forex trading, News · 0 Comment
