The GBP/JPY rate: To buy or not to buy, that is the question?
The pound sterling is trading at a 15 day best against the Japanese yen on Friday as the UK currency's decent month extends.
A turnaround in risk appetite is instructive as we have seen the British pound gain, and the 'safe-haven' yen fall, as investors seek out higher-yielding assets.
“Bulls have made some impressive ground, but there are some significant technical barriers overhead that need to be overcome for this to be anything more than merely another bear market rally,” says Richard Perry, market analyst at brokers Hantec in London.
These barriers include the old mid-March low at 158.40 and – at the same level - a down-trend line with dates back to December.
Although Relative Strength Index (RSI) has been improving it has reached just short of RSI 50-52 which has repelled momentum on the previous two occasions the pair rallied, and therefore could do so again.
"The other momentum indicators also suggest that rallies continue to be seen as a chance to sell, with negative medium term configuration on the Stochastics and MACD lines."
However, there are other signs that hint at upside potential:
“Interestingly the hourly chart shows a near term base pattern that implies a rally to 159, however bear market rallies will often undershoot their recovery targets, so I would see 158.40 as a likely sell-zone now.”
“Yen may have seen its Highs as Investors eye Stimulus”
The question of whether or not GBP/JPY is likely to rally is partly a question of yen strength.
At risk of stating the obvious here, if the broader yen exchange rate complex finds its feet again then the pair will likely re-capitulate.
According to analysts at Citibank, however, this is unlikely to happen, as they see increasing chances of the Bank of Japan (BOJ) stepping in to prevent the further appreciation of the currency using more money printing and other monetary stimulus measures.
The BOJ do not want the yen to appreciate substantially higher because it makes Japanese exports less competitive.
According to recent commentary from the head of the BOJ, Governor Kuroda, an overly strong yen has a “Negative Impact on the Yen.”
Quoting Governor Kuroda they report his as saying:
"If excessive appreciation continues, that could affect not just actual inflation, but the trend in inflation through its impact on business confidence, activity, and even through inflation expectations."
Citi therefore expect the BOJ to announce further easing measures at their next meeting:
“Kuroda's comments yesterday on the impact of the negative Yen are a major concession and suggest a monetary stimulus package may be on the way sooner rather than later.”
Strategists at Citi has also remarked that investors may have reduced their need to buy JPY for hedging purposes, further indicating the pair may have reached its low for the year:
“Citi Japan strategists suggest Japanese institutional investors will now likely have a reduced need to buy JPY for hedging purposes all of which probably suggests USDJPY may have seen its lows for the year.”
Signs of a Rise in Commodities Do not Bode well for Yen
The recent rise in commodities, including oil, silver, iron ore and copper, are all signs that commodities are probably now entering a bullish new cycle.
If this is so then this is likely to have a negative effect on the yen, which is negatively correlated with the prices of commodities.
This means it goes in the opposite direction to the price of commodities.
This is due to the large amount of raw materials and energy the country has to import, especially now that its nuclear power plants have all been closed down indefinitely following the Fukushima earthquake disaster.
A rise in commodities will also lead to better risk appetite which will be negative for the yen, which does better in crisis periods.
Large 8-10% Brexit Premium could be Unwound if polls show material shift in favour of ‘staying’
For the pound, the driver to strengthen would be most likely to come from a shift in voting, shown by polls in the run up to Brexit.
The pound’s rally against the yen over recent days, has, in a large part been due to an increase in the pro-euro stay vote, as well as comments from the governor of the Bank of England (BOE) highlighting the downside risks to the economy of leaving the Union.
If this continues and it reaches a point where the polls are showing a big lead for the stay campaign, this could lead to rapid rises in the pound as Brexit bets are unwound and some of the 8-10% weakness in sterling solely due to Referendum fears is unwound.