Decline in global economy and global risk appetite create favorable environment for USD/JPY bears
If anyone was confused by the USDJPY rally towards the zone of 114-114.5, that wasn’t me. Yes, as I had suggested, the Fed’s moderate hawkish rhetoric sent the pair towards the convergence zone. Yes, the yen has been sold against the U.S. dollar in the April-November period because of the growth-gap between the U.S. and the Japanese economies, oppositely focused policies of the central banks and great demand of the Japanese investors for the U.S. assets. However, the situation should change in future. When global economy is at the peak of its expansion, it’s time to think about buying safe-heaven assets.
Global GDP is charged by trade wars, weakening effect of the U.S. financial stimulus, high oil prices and the increased borrowing costs. For example, over a half of Wall Street Journal experts suggest that the U.S. economy should face recession in 2020. Donald Trump’s protectionism has already resulted in the German GDP decline; it’s been the first for the past 3.5 years. The Japanese economy hit the red zone in the third quarter for the same reason, among others. In addition, the influence of import tariffs on international trade becomes evident with a time-lag. That is why the IMF anticipates the strongest negative impact of trade wars on the USA and China to be clear in 2019-2020
Dynamics of trade war impact on GDP levels in U.S. and China
The export-led Eurozone is already suffering from protectionism and high political risks, which discourage investors from keeping their money in the Old World. Besides, there is still the danger for the EU that Washington will boost tariffs on car imports and the U.S. demand will be shrinking due to the weakening of the fiscal stimulus effect. I don’t need to mention the impact of increased borrowing costs in the U.S. and the dollar revaluing on the emerging markets. Therefore, global economy is likely to have reached its peak in 2017-2018; so, it should slow down in 2019-2020.
If so, the S&P 500 correction will be getting more likely, increasing the chances of the USD/JPY drop. Yen is traditionally seen as a safe-heaven asset. It has been quite closely correlated with the stock indexes in historical terms; which can’t be said about beta.
Dynamics of correlation between USD/JPY and S&P 500
According to Deutsche Bank, the reasons are in the activities of the Japanese investors who are actively buying out all the S&P 500 drops and more often refuse to hedge against the exchange rate risks due to high hedging costs. If demand for the U.S. securities will be getting lower due to the U.S. GDP slow down and the Fed’s monetary normalization, the Japanese will be the first to escape.
In my opinion, a gradual decline in global economy and global risk appetite will be drawing the USD/JPY down towards 111.5, 110 and 107.5 in the fourth quarter of 2018 and during the first and the second quarters of 2019. In the short run, it makes some sense to sell EURJPY amid the growing political crisis in Italy.
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Price chart of USDJPY in real time mode
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