Market Overview

4 February 2020

Japanese Yen Fluctuates Alongside Stock Market Movements

The safe-haven Japanese Yen slid today during the Asia trading session, as the main world indexes continue to rebound from last week lows.

Chinese financial authorities took some necessary measures to try to mitigate the impact of the coronavirus on the market. The People's Bank of China (PBoC) provided additional Renminbi liquidity to the equivalent of $174 bln before this Monday opening, which was the PBoC's largest one-day intervention since 2004. Reducing the seven-day reverse repo rate to 2.4% from 2.5% also helped to improve investors' sentiment. Moreover, the PBoC provided some $53 bln in a seven-day reverse repos and $21 bln in 14-day repo operations on Tuesday to calm the market. The PBoC also mentioned the possibility of additional loosening of the monetary policy on February. 20 by cutting the loan prime rates (LPR), if necessary.

After the high closing near 3000 points level before the Chinese New Year holidays and Monday's narrow 2715-2745 trading range, the Shanghai Composite Index (SSEC) opened today at almost 2% lower than last closing at 2685, but gained attitude soon after and finished the day at around 2785. The blue chip China Index (CSI300) has performed a two % rise. This kept the American S&P500, and especially the Nasdaq indexes, far away from Friday's lows and strongly supported USD/JPY at least at the moment. The Yen is now hovering at 109 against the US Dollar while EUR/JPY is moving to 120.50, which is above the 120.35 five-day technical resistance.

Some positive incentives were provided in the remarks by f Bank of Japan's Governor Haruhiko Kuroda. According to Reuters, the Governor said on Tuesday that China's economic presence was big and thus the impact from the virus could also be large. Speaking at the Parliament, he emphasised that he would pay maximum attention to the coronavirus effect on Japan's economy and prices. The Bank of Japan will be ready to provide additional monetary stimulus in case of slowing economy, he added

The Yen is still very sensitive to any movements on the stock markets. Since January 20, the markets have regularly seen money flows redirected from the US Dollar, the Euro and other currencies to the Japanese Yen, alongside the downward corrections in stock indexes. Those capital inflows pressured the Yen from 110.2 to 108.3 against the Greenback, and EUR/JPY declined from 122.35 to 119.80 before the end of January. Investors continue to use the Yen as a currency for carry trade operations, in order to conduct "bullish" strategies on the stock market. Any vulnerabilities, like the ones being witnessed lately, , may trigger high volatility for the Japanese currency, which may have it move to the rhythm of each and every stock indexes' big and small fluctuations. USD/JPY and EUR/JPY may be seen to be a little more interesting now amid the halt in the risk-off market game, but the situation could change once again at any moment.

"There was a turnaround in risk sentiment as the sell-off in stocks and the buying of safe-havens last week were a bit ever done," said John Doyle, vice president of dealing and trading at Tempus Inc in Washington. "But to be honest, I don't think there was any difference on the state of the virus between Friday and Monday. I guess markets like the fact that China is being pro-active in trying to contain the virus an in easing the impact on its economy," he concluded.

Another opinion expressed in Reuters by Jasper Lawler from London Capital Group was that "havens like the Yen and Dollar were slightly lower while riskier and Asian currencies like the Aussie are off recent lows. But there will need to be a let up in equity market selling and some other macro catalyst, perhaps U.S. non-farm payrolls to see the 'risk-on/off' theme in forex reverse."

The next US jobs report (non-farm payrolls) is due to be released this Friday, on February. 7.


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