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#1 24-09-2020 09:31:21

johnedward
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From: Paris - France
Registered: 21-12-2009
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USD/JPY: what explains the Yen's recent vigour?

USD/JPY: what explains the Yen's recent vigour?


A safe haven currency until recently, the yen is one of the year's best performers against the USD. The USD/JPY, once the symbol of a healthy stock market, has lost its mojo - the direct correlation with the Dow Jones or the S&P 500 has disappeared.

This is both a blessing and a curse. It is a blessing because we can now trade the exchange rate without having to consider what the U.S. stock market will do. On the other hand, it becomes difficult to predict its direction.

USDJPY - Fading Trump's policies

The easiest way to interpret the USD/JPY and the decoupling of the stock markets is to remember Trump's election day. Prior to the election, the two markets (i.e. the USD/JPY and the U.S. stock market) moved hand in hand - when the Dow Jones fell, the USD/JPY followed. Or, when the S&P 500 rose, the USD/JPY followed.

Similar actions took place a few days after the election. The U.S. stock market rose massively, as did the USD/JPY. It went from around 99 to 119, in an almost vertical movement, just like stocks.

Then the JPY pair erased the stock market movement. Slowly but surely, in the years that followed, it returned almost all the gains, only to fall back to 105 recently.

Monetary policy differences have disappeared

One explanation for a strong yen is that differences in monetary policy have disappeared. Australia has rates nearing zero, and the downward trend started long before the Fed's late upward cycle began.

Europe's central bank has had the deposit facility rate below zero for several years. As has the Swiss SNB. The Nordic countries in Europe have also had negative rates.

Suddenly, Japan was no longer the only country with zero interest rates. Moreover, quantitative easing (QE) is the norm in all developed countries. As a result, the yen has regained its flexibility, better reflecting its role as a fiduciary currency.

Shinzo Abe's resignation has also strengthened the yen

Japan's oldest Prime Minister, Shinzo Abe, has announced his resignation. The new government, led by Suga, is considered the third most popular in the country's history.

It has led to a sharp rise in the yen, as the implications are that "abe-onomics" are no longer in the people's favour. Also, at the core of "abe-onomics" you have a weaker yen.

The interesting story told by the yen reflects how monetary policies around the world change the performance of a currency. Coupled with political changes, money has an easier time decoupling itself from old correlations.

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