Japanese Yen strengthens to 152.00 against USD, upside potential seems limited

• The Japanese Yen edges higher on Thursday after some verbal intervention from officials. 
• The BoJ rate-hike uncertainty should cap the JPY ahead of the general election on Sunday.
• Bets for a less aggressive Fed easing should offer some support to the USD and USD/JPY. 

The Japanese Yen (JPY) attracts some buyers following verbal intervention from officials on Thursday and reverses a part of the overnight steep decline against its American counterpart, to the lowest level since July 31. Apart from this, a modest US Dollar (USD) downtick drags the USD/JPY pair to the 152.00 neighbourhood heading into the European session. That said, doubts over the Bank of Japan's (BoJ) ability to hike interest rates further this year, on the back of election-related uncertainty in Japan, should keep a lid on the JPY recovery move. 

Furthermore, growing acceptance that the Federal Reserve (Fed) will proceed with modest rate cuts, along with deficit-spending concerns after the US election, should keep the US bond yields elevated and limit the downside for the USD. Furthermore, signs of stability in the equity markets should further contribute to capping the upside for the JPY and support prospects for the emergence of dip-buying around the USD/JPY pair. Traders now look to the flash PMIs for fresh insight into the health of the global economy and short-term impetus. 

Daily Digest Market Movers: Japanese Yen is underpinned by intervention fears, BoJ uncertainty might cap gains

• Japan's Finance Minister Katsunobu Kato expressed concern over one-sided, rapid moves in the currency market and reiterated that  it is desirable for currencies to move stably reflecting economic fundamentals
• Adding to this, Japan's Deputy Chief Cabinet Secretary Kazuhiko Aoki said this Thursday that the government is watching FX moves closely, including speculative moves, with a sense of urgency.
• A private-sector survey released earlier today showed that business activity in Japan's manufacturing and services sectors contracted in October, pointing to weaker overall economic conditions in the country.
• The Au Jibun Bank flash Manufacturing PMI declined to 49.0 in October from the 49.7 previous, marking the fourth straight month of contraction on the back of subdued local and overseas demand, and weak orders.
• Adding to this, the au Jibun Bank flash services PMI contracted for the first time since June and fell to 49.3 during the reported month, while the composite PMI dropped to 49.4 in October from 52 in the prior month. 
• Recent opinion polls indicate that Japan's ruling Liberal Democratic Party (LDP) could lose its majority after the upcoming general election on October 27, fueling uncertainty about the Bank of Japan's rate-hike plans.
• The yield on the benchmark 10-year US government bond shot to a three-month high on Wednesday amid market conviction that the Federal Reserve will proceed with modest interest rate cuts over the next year.
• The odds of former President Donald Trump winning the November 5 US presidential election fuel speculations about the launch of potentially inflation-generating tariffs that will keep the US bond yields elevated.
• The US Dollar retreated a bit from its highest level since late July touched on Wednesday as bulls opt to take some profits off the table following the recent upsurge witnessed since the beginning of this month. 
• The release of flash US PMI prints, along with the US bond yields, will influence the USD price dynamics later during the North American session and provide short-term impetus to the USD/JPY pair. 

Technical Outlook: USD/JPY could accelerate the corrective decline once the 152.00 mark is borken decisively

From a technical perspective, Tuesday's breakout above the 150.65 confluence hurdle and the 200-day Simple Moving Average (SMA) was seen as a fresh trigger for bullish traders. The subsequent move up, however, stalls near the 61.8% Fibonacci retracement level of the July-September downfall amid a slightly overbought Relative Strength Index (RSI) on the daily chart. The said barrier is pegged near the 153.20 area and should now act as a key pivotal point, which if cleared decisively should pave the way for an extension of over a one-month-old uptrend. The USD/JPY pair might then aim to reclaim the 154.00 mark and climb further towards the 154.30 supply zone. The momentum could extend further towards the 154.75 horizontal zone en route to the 155.00 psychological mark and the July 30 swing high, around the 155.20 region.

On the flip side, any meaningful corrective slide now seems to find decent support near the 152.00 round figure. A convincing break below could drag the USD/JPY pair further towards the 151.45-151.40 intermediate support en route to the 151.00 mark, though the fall might still be seen as a buying opportunity. This should help limit the downside near the aforementioned confluence resistance breakpoint, now turned support, near the 150.65 region, which should now act as a strong base for spot prices. Sustained weakness below, however, will suggest that the upward momentum has run out of steam and shift the near-term bias in favor of bearish traders.

Risk sentiment FAQs

What do the terms"risk-on" and "risk-off" mean when referring to sentiment in financial markets?

In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.

What are the key assets to track to understand risk sentiment dynamics?

Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.

Which currencies strengthen when sentiment is "risk-on"?

The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.

Which currencies strengthen when sentiment is "risk-off"?

The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.

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