Geopolitical and global trade fears kept the yen in the green last week. Will the bulls extend their wins over the next couple of days?
Flash manufacturing PMI (Aug. 23, 12:30 am GMT)
Japan’s manufacturing report doesn’t usually move the yen for long, but a lot of traders DO watch the release.
See, manufacturing activity can give us clues how factors like a weak yen and global trade uncertainties are affecting demand for Japanese products.
With Japan failing to ink bilateral trade agreements with the U.S. last week, investors will want to see just how vulnerable Japan’s manufacturing industry is to further disruption in case of a mini trade war with trade partners with the U.S. and China.
Trade and geopolitical updates
Contagion fears over sharp depreciations of the Turkish lira and Chinese yuan pushed the low-yielding yen higher across the board last week.
While Turkey’s troubles have (somewhat) cooled down, we still can’t rule out any extension of last week’s moves when a new headline pops up.
And then there’s the U.S.-China trade war, which could go in either direction this week. If you recall, trade reps from both countries are set to meet just before the U.S. increases tariffs on more of China’s products on August 23.
Will we see a de-escalation of conflicts this week? Or will the economic giants double down and worsen the investors’ global trade war fears?
Make sure you’re watching the newswires closely for any related headlines that might shift overall risk sentiment!
Last Week’s Price Review
The yen may soon mark its second week of net wins since the yen is currently in second place (as of 8 am GMT).
The yen isn’t assured of victory, though, since the yen’s wins against the Greenback, the Swissy, the Loonie, and the euro aren’t really that big.
Looking at the overlay of inverted JPY pairs and the yield of benchmark 10-year U.S. bonds, it’s pretty clear that JPY pairs were tracking bond yields very closely this week.
The yen actually gapped higher on most pairs at the start of the week, thanks to combative statements from Turkish President Erdogan over the weekend which caused the Turkish lira to extend its slide from last Friday and reignited fears of a possible contagion effect.
Risk aversion continued to plague the market during Monday’s London session, but the yen took a step back. And as you can see in the chart above and as noted in Monday’s London session recap, that was apparently because of rising bond yields.
And according to market analysts, bond yields rose because global fundamentals remained relatively robust and the Turkish central bank’s promise to keep banks supported helped to ease contagion fears.
However, bond yields turned lower on Wednesday due to renewed Turkey-related fears, which spurred safe-haven demand for bonds, market analysts say. And so the yen got a bullish infusion as a result.
And the apparent catalyst for the fall in bond yields and the yen’s rise is a CNN report that I mentioned in Wednesday’s London session recap since the report noted that the Turkish lower court has rejected Brunson’s appeal to be released from house arrest for the second time, adding that Brunson’s appeal will be heard by an upper court on October 12.
And since Brunson’s imprisonment was used by the U.S. as a pretext to slap sanctions against Turkey last week, the implication here is that U.S. sanctions won’t be going away for some time and will continue to weigh on the Turkish economy.
Bond yields recovered during Wednesday’s U.S. session, though, supposedly because of optimism brought about by positive U.S. data, according to market analysts. And as a result, the yen’s rally was cut short.
After that, bond yields climbed higher for a bit before moving somewhat sideways. And JPY pairs were still apparently taking their marching orders from bond yields.