JP Morgan on the yen – narrow ranges to persist

JPM client note on the Japanese yen, say its losing its attraction as a safe haven play

USD/JPY annual range of less than 10% for three consecutive years

  • 2019 range less than 8% (smallest since 1980)

Yen:

  • “when a risk-on mood was strong, market participants would normally actively engage” in the yen-carry trade
  • but when risk-off hit “investors would be pressed to close their positions”  – to sell the higher-yield currency & buy back yen they had sold, which is why the yen would strengthen in risk-off environments 
  • “But because in recent years the yen is no longer being sold off in the first place, it is not acting as much like a safe-haven currency as in the past”

JPM on what will prompt wider ranger:

  • if interest rates increase in other countries (opening a wider gap with rates in Japan)
  • would encourage yen-carry trades

Yeah 1980 might have been a narrow range but as the 80s went on things did hot up (check your historical charts …. google the Plaza Accord)

Probably not about the yen range but its from the 80s (ok, 1979)

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Asia stocks sag, bonds rally as trade war fears persist

© Reuters. A man looks on in front of an electronic board showing stock information at a brokerage house in Nanjing © Reuters. A man looks on in front of an electronic board showing stock information at a brokerage house in Nanjing

By Shinichi Saoshiro

TOKYO (Reuters) – Asian stocks tracked Wall Street losses on Thursday as rhetoric from Beijing and Washington over trade matters kept alive investor concerns about the tariff war’s impact on global economic growth.

The risk aversion propped up global safe-haven assets such as government bonds, with yields on German benchmark debt approaching record lows.

The dispute between the world’s two largest economies showed few signs of abating, with Chinese newspapers reporting that Beijing could use rare earths to strike back at Washington after U.S. President Donald Trump remarked he was “not yet ready” to make a deal with China over trade.

Japan’s was down 0.5% and Australian stocks shed 0.66%.

MSCI’s broadest index of Asia-Pacific shares outside Japan stood little changed after slipping to a four-month low the previous day.

“The equity markets are in the midst of pricing in a long-term trade war, with participants shaping their portfolios in anticipation of a protracted conflict,” said Soichiro Monji, senior strategist at Sumitomo Mitsui DS Asset Management.

“The upcoming G20 summit could provide the markets with relief, as the United States and China could use the event to begin negotiating again over trade.”

The G20 meeting is set for June 28-29 in Japan.

Amid the flight-to-safety Germany’s 10-year bond yield fell to a three-year trough of minus 0.179% overnight. A drop below minus 0.200% set in 2016 would take the yield to a record low.

Spanish and Portuguese 10-year yields fell to record lows as deeply negative German Bund yields have encouraged investors to look elsewhere for returns.

Elsewhere, the stood at 2.267% after falling to a 20-month low of 2.210% on Wednesday.

Lower Treasury yields not withstanding, the against a basket of six major currencies was steady at 98.139 following two straight days of gains, with the greenback serving as a safe haven.

The euro was a shade higher at $ 1.1141, pulling back slightly following three successive days of losses.

The dollar was little changed at 109.615 yen after bouncing back from a two-week low of 109.150 brushed on Wednesday.

Oil prices rose modestly following volatile trading on Wednesday, when they fell to near three-month lows at one point as trade war fears also gripped the commodity markets.

futures were up 0.43% at $ 59.06 per barrel after brushing $ 56.88 the previous day, their lowest since March 12.

Trade worries have weighed on oil but supply constraints linked to the Organization of the Petroleum Exporting Countries’ output cuts and political tensions in the Middle East have offered some support.

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China outlook for 2019 & 2020 – gradual slowdown to persist (yuan forecasts also)

A note from ABN Amro on their outlook for China 

These the highlight points from a detailed note:

  • 2018 marks the resumption of China’s gradual slowdown … driven by financial deleveraging and initial drags from trade conflict US
  • Should downside pressures intensify, Beijing has more room for stimulus
  • Yuan weakness also cushions impact tariffs, but we expect some recovery
  • All in all, we expect China’s slowdown to remain gradual in 2019 and 2020
  • Main risks: tensions with the US, other geopolitical risks, high debt levels

Further on the yuan:

In our base scenario, we still do not expect the PBOC to tolerate much sharper depreciation versus USD, for two reasons. 

  • First, Beijing has learned lessons from the market turbulence seen in 2015-16, when sharp CNY depreciation expectations triggered large capital outflows and downward pressure on FX reserves. Capital outflows have indeed risen this year and FX reserves have started to fall again, but not as dramatically as the moves seen in 2015-16. 
  • Second, in its last bi-annual report on macroeconomic and foreign exchange policies of major trading partners published in October, the US Treasury’s language versus China turned more hawkish. 

It is likely that currency developments will be included in future negotiations between the US and China. In our base scenario, we expect dollar strength to fade next year

Outlook for the  currency:

  • we expect CNY to recover versus USD (our end-of-year forecasts for 2019-20: 6.70)
  • in case of a severe escalation of tensions between the US and China, the yuan may drop well below 7.0 in our view 

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