GBP/JPY retreats below 211.00 as risk appetite recedes

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The Sterling is trading lower from the fresh long-term highs above 212.00 hit on Tuesday, returning to levels right below 211.00. The safe-haven Japanese Yen is rallying across the board with risk appetite receding, as tensions between China and Japan grow.

GBP/JPY hits lows below 211.00 after rejection at the 212.00 area.
The safe-haven Yen appreciates across the board as Japan-China tensions sour market mood.
Concerns about Japan's finances are keeping Pound's downside attempts limited for now.

Beijing banned exports of dual-use goods that can be used for military purpposes to its Asian neighbour on Tuesday, in retaliation for the Japanese Prime Minister Sanae Takaichi’s comments about Taiwan.

Takaichi affirmed in November that a hypothetical Chinese attack on the island of Taiwan could trigger a military response from Japan, which caused a diplomatic rift with China, and soured the relations between the world’s second and third largest economies.

Beyond that, Bank of Japan (BoJ) Governor, Kazuho Ueda, reiterated on Monday that the bank remains committed to further monetary tightening, which provided additional support to the Yen.

In the UK, services activity data disappointed on Tuesday, as December’s final S&P Global Services PMI was revised down to 51.4, from the previously estimated 52.1.

The broader GBP/JPY trend, however, remains bullish, with the pair nearly 6% above early November lows, as market concerns about Japan’s fiscal health keep acting as headwinds for any significant Yen recovery. In December, Prime Minister Takaichi’s cabinet approved an $118 extra budget to finance a stimulus plan, which is expected to add tensions to the country’s already strained finances.

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.