Risk aversion is key driver of yen

The Japanese yen (JYN) continued to be in demand despite the drop in geopolitical risk arising out of the US-North Korea tensions. In the beginning of the previous week, which ended on August 18, the Japanese yen (FXY) gave up all its gains to reach 110.60 to the US dollar (UUP), but the gains were reversed as political uncertainty in the US prompted investors to seek refuge in the safe-haven yen. Japan reported its trade data last week and the trade balance for July was reported at 419 billion against a market expectation of 392 billion. Estimated 2Q GDP came in sharply above expectations with quarter-over-quarter growth estimated at 1% and year-over-year growth projected at 4%.

Japanese equity markets (EWJ) remained weak as the yen rallied in the previous week with the Nikkei 225 (JPXN) posting a weekly loss of 0.44%.

Will Risk Aversion Increase the Demand for Japanese Yen This Week?

Speculators reduced bearish bets on the yen

The Japanese yen speculators continued to remain bullish on the currency in the previous week. As per the latest Commitment of Traders (or COT) report, released on August 18 by the Chicago Futures Trading Commission (or CFTC), currency market speculators’ net positions have fallen 18,321 contracts. The total net speculative positions stood at -77,492 contracts as compared to -95,813 contracts in the week before. This data is only up to August 15, and long positions would have further increased after the rise of risk aversion in the last three sessions of the week.

Will there be continued demand for the yen this week?

Core CPI is the only important data release from Japan this week and is unlikely to have any major impact. The key driver for the yen would be the risk-on/risk-off status of the global markets. If risk aversion from the previous week continues, we can expect the Japanese yen to test the 108 levels this week.

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