With market risk aversion boosted by worries over the future of the Greek bailout investors continued to flock to the safe-haven Japanese Yen ahead of the weekend. There were worries that the Hellenic nation might not receive its next tranche of bailout funds in time to make hefty debt repayments due over the summer, thus triggering another Eurozone debt crisis. Consequently this bolstered the appeal of the lower-risk Yen, which markets considered a more secure bet than rivals such as the Swiss Franc or US Dollar.
Even though the latest Japanese Manufacturing PMI fell short of expectations the Yen remained on stronger form on Monday. Investors had anticipated a reading of 50.1, which would have seen the manufacturing sector edge back into a state of expansion, but were ultimately disappointed to find that the index had instead fallen to 47.6. This would seem to suggest that the domestic economy remains in a state of slowdown, in part caused by the rampant strength of the Yen itself.
However, the GBP/JPY exchange rate entered a strong rally after an opinion poll indicated that the ‘Remain’ camp had extended its lead of ‘Leave’ to thirteen points. As a result markets were inclined to lower their odds for the likelihood of a ‘Brexit’ further, with investors piling back into the Pound throughout trading on Tuesday. Comments from Bank of England (BoE) Governor Mark Carney also added fuel to Sterling’s uptrend, particularly as Carney has been noted to have the greatest influence over undecided voters.
Fears of BoJ Easing Bias Boosted GBP/JPY Exchange Rate
Increasingly hawkish comments from members of the Federal Open Market Committee (FOMC) also helped to weaken the Yen. The Presidents of the San Francisco and St Louis Federal Reserves both indicated that interest rates could be raised two or three times before the end of the year, seeming to raise the odds of a June rate hike. While there remains some scepticism amongst investors this nevertheless saw the US Dollar strengthen sharply, pushing the Yen lower in response.
Comments from Bank of Japan (BoJ) Governor Haruhiko Kuroda did not improve the appetite for the Yen on Wednesday. Kuroda took a more dovish tone than anticipated, acknowledging that domestic consumption was not currently strong enough and thus hampering the recovery of the economy. However, the policymaker also reaffirmed a commitment to meeting the central bank’s 2% inflation target, something which would seem to suggest a high likelihood of further monetary easing to come.
The Pound, meanwhile, remained on bullish form across the board in spite of a limited round of profit taking. Sterling sentiment was bolstered by a report from the Institute for Fiscal Studies (IFS), which warned that a vote to leave the EU could prompt an additional two years of austerity measures for the UK. This warning was considered to add further support to the ‘Remain’ campaign, increasing market optimism and allowing the Pound to extend its recent gains further.
Yen May Weaken as Japanese Inflation Continues to Decline
This strength is likely to falter in the near future, though, as there remains little in the way of positive domestic data to shore up the currency. The second revision of the UK first quarter GDP is expected to show no change, with the reminder of weakening domestic growth likely to take some of the air out of the Pound’s sails. Weakness could also be prompted by Friday’s GfK Consumer Confidence Survey, which is forecast to drop from -3 to -4 in May.
While April’s Japanese Consumer Price Index is anticipated to show a continued weakening in domestic inflationary pressure this may not have such a negative impact on the Yen as might be expected. The Yen has shown a surprising resilience to weaker domestic data in recent weeks, largely due to wider trends in market sentiment shoring up the safe-haven. Nevertheless, with inflation potentially retreating further from the BoJ’s target this could offer support to the GBP/JPY exchange rate.