Japanese Yen recovers early losses against US Dollar as market sentiment improves

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The Japanese Yen (JPY) claws back its early losses against the US Dollar (USD), turning flat around 158.50 during the European trading session on Tuesday. The USD/JPY pair falls back as the US Dollar surrenders its early gains amid improving investors’ risk appetite.

The Japanese Yen recovers almost its entire early losses against the US Dollar as the risk-on mood strengthens.
Improving market sentiment has weighed on the US Dollar’s safe-haven demand.
BoJ’s Ueda expresses confidence that inflation will continue to accelerate moderately.

In the European trade, S&P 500 futures have recovered their entire early losses and have turned positive around 6,600.00, indicating an increase in demand for riskier assets. Meanwhile, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, declines from the intraday high of 99.45 and flattens around 99.15.

Growing expectations among market participants that the war in the Middle East will not escalate further, following the announcement by United States (US) President Trump that he has instructed the Department of War to pause military attacks on Iran’s power plants for five days, has underpinned the risk-on stance.

Although Iran has dismissed reports claiming that it had direct talks with the US regarding the de-escalation of the conflicts, positive comments from US President Trump have triggered hope of a war resolution.

On the domestic front, remarks from the Bank of Japan (BoJ) expressing confidence that inflationary pressures will continue to accelerate moderately have supported the Japanese Yen. “Expect underlying inflation to accelerate moderately,” Ueda said earlier in the day, adding, “Tight labour market, firms active wage, price-setting behaviour will maintain a cycle in which wages and prices rise in tandem.”

Meanwhile, Japan’s National Consumer Price Index (CPI) ex. Fresh Food for February has come in lower at 1.6% Year-on-Year (YoY) than estimates of 1.7% and the previous reading of 2%.

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.