Growth in demand for safe haven assets allowed the USD/JPY bears to launch an attack 

Panic on the markets of developing countries allowed the Japanese yen to ride a roller coaster. Investors assessed the possibility of catching the Turkish disease and sold out EM assets and shares in bulk, which led to a drop in the USD/JPY.

The yen is one of the major funding currencies for carry trade, so the deterioration in appetite for risk caused players on the difference to close positions. At the same time, the markets were in a state where a light breeze could start an avalanche.

Despite the trade wars, traditional safe haven assets represented by the Japanese, the Swiss franc and gold ignored the factor of the potential slowdown in the world economy for most of the year. Investors preferred the dollar, which became an important driver of growth of the USD/JPY. The nerves of the market were stretched to the limit, as few people understood why the old connections did not work. A straw was needed that would break the hump of a camel. And then Turkey came.

Dynamics of safe haven assets


Source: Bloomberg. 

Fear has a hundred eyes. It is unlikely that any other monetary unit of developing countries can follow the lira. The currency reserves of the 12 largest EMs excluding China since 2009 have increased from $ 2 trillion to $ 3.15 trillion. Tighter financing conditions in the US did not become an obstacle for the transition of current account deficit to positive for the majority of the largest emerging economies. The exceptions are only Turkey and Argentina, but the latter does not have such large internal debts. Thus, it is unlikely that Ankara will be the beginning of the end for EM. Understanding this caused the USD/JPY bears to close shorts as quickly as they opened them.

From the levels of the March lows, the pair added about 6% due to the divergence in the economic growth and monetary policy of central banks. Japan risked in the second quarter to get into a technical recession, but in fact everything was much better than originally thought. GDP grew by 1.9% due to accelerated growth in business expenses (+ 5.2% y / y). Corporations, in the conditions of acute shortage of labor, prefer to increase their investments in order to increase labor productivity with the help of new technologies.

Dynamics of Japan's GDP

Source: Bloomberg.

The Japanese yen is still very far away from the dollar's + 4.1% q / q, but the growing likelihood of the narrowing gap in the third quarter plays into the hands of the

 USD/JPY bears.

At the same time, the yen has a helping hand in the form of the rumors about the hidden normalization of BoJ's monetary policy. The central bank over the past 12 months has increased its share in the structure of the ETF market from 65% to 74% and may face a shortage of assets. At the same time, the regulator reduced the actual scale of QE by almost half as part of the implementation of the yield curve management strategy.

Thus, narrowing the gap in the growth rates of GDP in the US and Japan, changes in BoJ's monetary policy and the growing risks of increasing demand for safe haven assets make the potential of the USD/JPY rally limited. I still forecast mid-term consolidation in the range of 109-113.5, while the pair's growth towards the upper border can be used for sales.

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Price chart of USDJPY in real time mode

Yen is nostalgic

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