JPY: Resilience of Oil Price Reinforces Improving Risk Sentiment - MUFG

JPY: Resilience of Oil Price Reinforces Improving Risk Sentiment - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the yen has weakened modestly in the Asian trading session while commodity related and emerging market currencies continue to outperform.

Key Quotes

“The ongoing improvement in global investor risk sentiment was reinforced overnight by the resilience of the price of crude oil which declined only modestly after oil producers failed to reach an agreement to freeze output. The initial sharp decline in the price of crude oil proved short-lived which has reinforced expectations that the price of crude oil has bottomed. However, market participants will now be watching nervously to see if Saudi Arabia will increase production which would increase downside risks tin the near-term.

Saudi Deputy Crown Prince Mohammed bin Salman threatened only last week that production could be increased immediately to 11.5 million barrels/day if there was demand and without an agreement to freeze output. The ongoing improvement in global investor risk has resulted in the Dow Jones Industrial Average closing above the 18,000 level for the first time since July of last year.

The rebound in commodity related currencies is continuing to derive support as well from building expectations that policy stimulus in China is helping to provide more support for economic growth in the near-term as evident by stronger than expected Chinese economic data releases so far from March. According to Bloomberg, Citi’s economic surprise index from China has risen to its highest level in a year.

The yen has been undermined as well by dovish comments from BoJ Governor Kuroda in an interview with the Wall street Journal. Governor Kuroda expressed concern that “if excessive yen appreciation continues, that could affect not just actual inflation, but even the trend in inflation through its impact on business confidence, business activity, and even through inflation expectations”.

The comments signal clearly that the recent strengthening of the yen have increased the likelihood that the BoJ will respond with further monetary easing at the end of this month. As Governor Kuroda has stated already, the G20 agreement won’t limit the room for further monetary policy easing if justified by domestic conditions. In contrast, Japan’s ability to intervene directly to dampen yen strength is far more constrained.”