Capital Trust Markets – The Japanese Yen (JPY) has lost strength against the U.S. Dollar during the Tuesday European morning, as Europe and the US impose relatively modest sanctions on Russia. The Yen had gained a considerable amount of strength throughout last week, as the Crimean secession referendum dictated a risk-off sentiment across global markets, fueling the demand for safe haven assets. While tension remains, market fears of stricter sanctions, and their potential for causing military and political unrest look to have allayed, shifting general sentiment.
During the first week of March, the USDJPY rose from month-long lows at 101.19 to reach its highest level since January 23, yet as the situation Eastern Europe unfolded the USD gave back this gain in its entirety, with the pair falling back to 101.19 Friday last week. A small corrective bounce throughout Monday’s trading hinted at a resurgence, but the upside momentum tapered off and the pair dropped sharply heading into the European open. As mentioned, the USDJPY has risen from the Tuesday European open, and is currently trading just shy of previous support at 101.75.
As is generally the case in times of geopolitical uncertainty, event driven sentiment will likely dictate the medium-long term trend. However, a number of key Japanese trade releases slated for Tuesday evening could catalyze a short-term shift.
At 19:50 EST, the Japanese Ministry of Finance will report February’s trade balance data. Consensus suggests rising export levels and slowing import levels will contribute to a trimmed trade deficit, with the headline figure forecast at JPY-590.
Assuming there are no significant changes in the Crimean situation, a tighter than expected deficit would reinforce the aforementioned resistance and catalyze a break towards the lows at 101.19. A daily close below this level would hint at a short-medium term downside bias, and offer up an initial target at February lows of 100.79.
Conversely, a miss would fuel the current bullish momentum in the USDJPY, with an initial target at the previous high of 101.93; that is, assuming Tuesday’s action doesn’t hit that level organically. A close above 101.93 leaves a relatively clear run up to previous resistance at 102.66, but keep the overarching fundamentals in mind when setting targets. In spite of Tuesday’s action so far, there will be a considerable number of forex traders waiting to pull the trigger on a USDJPY sell at the slightest hint of escalation in Ukraine. The current standoff has given the markets some breathing space, but exactly how much remains to be seen.
Written by Samuel Rae – Currency Strategist at Capital Trust Markets
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