USD/JPY extends gains above 159.50 in risk-off markets

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The US Dollar (USD) maintains an immediate bullish tone against the Japanese Yen (JPY) on Thursday, extending its rebound from Monday’s lows at 158.00 to levels above 159.50 so far.

The Dollar approaches the 160.00 level as hopes of a peace deal in the US-Iran war fade.
Iran has rejected the US peace plan and denied any negotiation with the US.
The increase in Oil prices might add pressure to Japan's fiscal stability, OCBC Analysts say.

The US Dollar (USD) maintains an immediate bullish tone against the Japanese Yen (JPY) on Thursday, extending its rebound from Monday’s lows at 158.00 to levels above 159.50 so far. Winding hopes of a price deal in the Middle East have hurt risk appetite, boosting the safe-haven US Dollar against its main peers on Thursday.

Iran has rejected the 15-point peace plan presented by the US, and its Foreign Minister, Abbas Araghchi, said in an Iranian English-language broadcasting TV that the Iranian government rejects any negotiations with the US while the bombings continue.

Meanwhile, Israel and Iran have continued exchanging attacks while the Strait of Hormuz remains closed for the fourth week. The sour market sentiment is boosting the US Dollar across the board.

Rising Oil prices threaten Japan's economic growth

Analysts from the OCBC Bank affirm that rising Crude prices are hitting Japan, amid worsening terms of trade, bringing the country’s strained fiscal stability back to the focus. The experts affirm that Japan´s large dependence on Middle Eastern energy imports makes the currency sensitive to the consequences of the US-Iran conflict, which might be offsetting the Japanese Yen’s traditional safe-haven status.

On Wednesday, the minutes of the last monetary policy meeting by the Bank of Japan (BoJ) revealed that policymakers debated the need for further monetary policy tightening amid the rising inflationary pressures, but failed to provide any significant support to the Yen.
In the US economic docket on Thursday, last week´s Initial Jobless Claims and an array of Federal Reserve speakers will be the main focus, although the main market driver is likely to remain the geopolitical scenario, and news coming from the war in Iran .

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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