The Japanese yen can be an enigma. Independent from the logic, the sensations, the fundamentals, the technicals, and the question marks. Yet allegory visualizes enigma, veiled in a word. Japan, the land of the rising sun has had rising fears of a recession. A survey of Japanese manufacturing sector showed the sharpest reduction in activity in seven years during the initial weeks of February. For this reason, amongst many others, investors are considering the US dollar as a “more practical safe haven” than the Japanese Yen as protection from China’s coronavirus risk which is very close to home. Add to the fact that the dollar offers both liquidity and yield.
The yen has slumped in recent days perplexing investors who associate periods of uncertainty and risk-off with a rising Japanese currency. The yen rose almost 6% during the 2011 nuclear disaster at Fukushima. The yen has risen when North Korea’s missiles flew over Japan. The currency market is not always a place of relentless logic. But has the yen lost its luster as a safe haven play? In times of distress as caused by the outbreak of the coronavirus, the yen should be trading at 107-108 against the dollar. But ignoring the pun, the sun has not been rising on the land of the rising sun. Japan’s pension whales may have made waves in currency markets by exacerbating the weakening of the yen stimulated by falling hedging costs as they were increasingly moving assets abroad to escape their low yield home environment. The dollar moved around 1.9 percent higher in two sessions last week to Thursday, reaching almost 112.30 to the yen, the largest two-day shift in almost two and a half years.
The coronavirus outbreak which has its epicenter in Hubei, China is likely to have a significant impact on global economies in 2020. Global growth forecast has been revised down by 0.2 percentage points to 3.0 percent. The impact is expected to come from a reduction in activities such as industrial production, transport, tourism, retail sectors and services. The outbreak will have knock-on effects in East Asian economies due to Chinese factory closures affecting demand for commodities. Globally, China is the largest trading partner of at least 50 economies, yet China is also the start or end of many supply chains, hence if China closes then the supply of most raw materials and their markets would be interrupted. Apple’s warning that it would miss its sales target is one of the high profile examples of coronavirus’ effect on global business.
As of writing, a punch-drunk risk rebound sets in the markets, with S&P 500 up +1.59 percent, but for how long with coronavirus spreading? Mixed messages over virus risks as stocks look to break a 4 day losing streak.
Dollar-yen, is currently trading at 110.60, with the dollar on the back foot. Intraday selling pressure remains with offers coming in at 110.65 and bids coming in at 109.90, and the price action is confirming the bearish bias. Further weakness is expected towards 109.30 and 109 figure. Only a rebound above strong horizontal resistance at 112.25 would invalidate this bearish view and call for an up move towards 112.60. At Mansa-X, we recommend a short dollar-yen position as a safe haven reaction play to the selloff in global equities.
The South African Rand a purest proxy for coronavirus emerging markets contagion is at the ‘last chance salon’ trading at 15.15. The rand stares at a potential weakening on credit downgrade to junk by Moody’s due to the South Africa’s rising budget deficit and slowing economy. We think the rand could be trading above 16 by mid-year.
Global oil demand will contract this quarter for the first time in more than a decade by 435,000 barrels a day because of the impact of the coronavirus as stated by the International Energy Agency. China which accounted for more than three-quarters of global oil demand growth in 2019 is already showing a slowdown in consumption and the wider economy, further castigated by border closures, flight cancellations and travel restrictions across China. As for US Oil (WTI), here at Mansa-X, we recommend a sell the rebound whenever one can get it. Oil prices could be headed to $40 levels.
Gold is correlated to the corona virus and it is set to turn parabolic, again, which is already non-linear and exponential and it has escaped its velocity! It has traded off from highs reached on Monday ($1,689.33), currently at $1642, this is a little bit of a gift, so you buy it with all that you have got right now. We will soon see a $2,000 print on gold. Happy Days.
The US Dollar has been strengthening broadly as investors seek safe haven assets. Turkey’s Central Bank cut rates, again, last week sending the Turkish Lira to its weakest level against the dollar since late May 2019. This was the sixth cut in seven months, with the benchmark rate now at 10.75 percent from 11.25 percent. Turkey is quite at a perilous place with the constant calls by President Erdogan to the central bank to crank up the economic growth volume by easing monetary policy, the contagion of the coronavirus, and at the brink of a diplomatic spat with Russia over Syria.
Markets behaviour can be an enigma, but engage not in its stigma, for sometimes its terminology is all psychology. We all learn to walk before we stand, don’t be the bull that cries below the sky just because you bought the elixir!