Japanese Yen sticks to intraday gains as trade-war fears underpin safe-haven assets

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The USD/JPY pair sticks to heavy intraday losses through the Asian session on Monday, though it manages to defend and rebound a few pips from the 154.00 round-figure mark. Spot prices currently trade around the 154.35 region, still down over 0.45% for the day, and seem vulnerable to slide further.

USD/JPY kicks off the new week on a weaker note as trade-war fears boost the safe-haven JPY.
Fed rate cut bets weigh heavily on the USD and further contribute to the pair’s intraday slide.
Japan’s fiscal concerns and delayed BoJ rate hike bets cap the JPY, limiting losses to spot prices.

The global risk sentiment takes a hit in reaction to US President Donald Trump's decision to impose a new global levy of 15% following a Supreme Court verdict on Friday against his sweeping tariffs. The announcement fuels concerns about retaliatory measures and potential economic fallout from disruptions to global supply chains, which tempers investors' appetite for riskier assets and boosts demand for the traditional safe-haven Japanese Yen (JPY). Apart from this, a broadly weaker US Dollar (USD) turns out to be another factor exerting downward pressure on the USD/JPY pair.

The US Personal Consumption Expenditures (PCE) Price Index released on Friday showed that the underlying inflation rose more than expected in December, reaffirming bets that the US Federal Reserve (Fed) would keep rates unchanged in March. However, traders are still pricing in the possibility of two 25-basis-point (bps) rate cuts by the Fed this year in the wake of the weak US GDP print, which indicated that the economic growth decelerated sharply to 1.4% annualized pace in Q4. This, in turn, drags the USD further away from a nearly one-month high, touched on Friday.

Japan's weak GDP growth in the fourth quarter puts extra pressure on Prime Minister Sanae Takaichi to announce more stimulus to boost the economy. Furthermore, data released on Friday showed that Japan’s key inflation gauge eased to the slowest pace in two years, tempering expectations for an immediate policy tightening by the Bank of Japan (BoJ). This, in turn, keeps a lid on any further JPY appreciation amid relatively thin trading volumes on the back of a bank holiday in Japan and acts as a tailwind for the USD/JPY pair, warranting some caution before placing aggressive directional bets.

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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