The Japanese Yen not only enters 2019 as a leading contender to out-perform its G10 currency counterparts, but is also expected to exceed the performance of an overwhelming number of its global peers due its safe-haven appeal in periods of market uncertainty. We expect an abundance of anxiety that the new trading year could very much encourage a theme of investors “selling everything”, which is a proxy of strength in the Yen due to its status as a safe-haven asset in recent times.
Investors need to make no mistake that market participants are extremely loyal to the Japanese Yen during periods of market uncertainty. And 2019 is going to bring challenges to the global economy that will magnetize investors to the Yen. The leading reason why I am so strong on the Yen this year is that despite no shortage of noise out there that the world economy will slow down in 2019, this has still not been factored into a large range of market valuations. No one will know for sure to what extend the world economy could slow down this year until economic data releases come through.
Authorities in Japan will become increasingly concerned about the improved momentum for the Japanese Yen. But there isn’t anything that can be done to prevent this trend until the uncertain political risk environment that has rattled financial markets is removed from the atmosphere. When you are talking about unpredictable cowboy politics that is changing on a day-to-day basis, not to mention that the trade disputes between major economies represents a serious downside risk to economic momentum along with a wide range of other issues, it’s very easy to understand why there is pessimism in global financial markets this year.
Interestingly enough, it is actually the resilience of the USD that will provide a favour to authorities in Japan over the concerns of potential Yen strength. The USD is going to enter 2019 at risk of being an over-crowded selling trade, because of the strong negative market sentiment.
What needs to be remembered is that even if the United States economy does slow down this year, the nation remains likely to still print far better growth levels compared to other economies. The high-yielding nature of the Dollar due to the higher interest rates on offer in the United States represents another reason why the Dollar should remain resilient as long as the Federal Reserve do not provide a signal on a potential U-turn in the monetary policy outlook.
In regards to the technical picture for the USDJPY, an eye must be kept on the 110 handle because a close below this will open up the floodgates for the momentum of this pair to be tipped firmly in favor of sellers. Consistent signs of easing tensions between the United States and China would be required to inspire the type of risk appetite that would weaken the Japanese currency. Until this actually occurs, the Yen will remain as the undisputed king of the FX markets 2019.
*Charts updated on Friday 4 January*
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Written by Jameel Ahmad, Global Head of Currency Strategy and Market Research at FXTM
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