Yesterday's forecast for the yen came to life quite quickly - even too quickly, given the ambiguous fundamental background. I believe the dynamics of the USD/JPY pair surprised many currency strategists because in just a few hours the price impulsively collapsed to the lows of 2018, reaching the 104th figure. After that, a corrective pullback followed but the general mood for the pair still remained bearish.
What is the reason for such a powerful price impulse? According to most experts, the blame for everything is a sharp surge of anti-risk sentiment, which was caused by several factors at once. First, meeting between the American president and the leaders of both parties of the House of Representatives and the US Senate ended in failure yesterday. Trump rejected the Democrats 'plan, suggesting a fourfold decrease in the cost of the wall with Mexico instead of $ 5 billion, Democrats agreed to allocate 1.3. This means that the "Shutdown" regime continues and the political opposition is entering a protracted phase.
The second reason for risk aversion is China. This week there were published disappointing data indicating a slowdown in Chinese industry. Thus, the PMI index for the manufacturing sector dropped to 49.8 points which was the worst result last year, as well as the PMI Caixin/Markit manufacturing index, which for the first time since spring 2017 was in the contraction zone and fell below 50. The market started talking once again about slowing the global economy with all the ensuing consequences.
In addition, the strengthening of the yen contributed to other equally important circumstances. Yesterday in particular , Apple CEO Tim Cook sharply lowered the revenue forecast for the first quarter by 8 percent at once from 91 to 84 billion dollars. It is noteworthy that Apple revised upwardly to a fairly fresh forecast and the target of 91 billion was set only two months ago. According to Tim Cook, the negative dynamics is associated with the US-China trade conflict, as well as with a decrease in the cost of smartphone batteries. In addition, he stressed that the company is under certain pressure from the Fed policy. Tightening monetary policy contributes to the inflow of foreign capital and the strengthening of the dollar.
The stock market reacted to this unexpected news accordingly: the company's quotes fell by more than seven percent. The yield on 10-year-old treasures dropped to 2.633% and the foreign exchange market did not stand aside because we are talking about the world's largest company by capitalization. Apple's problems only increased the demand for "safe haven" currencies, including the yen. Moreover, unpleasant "surprises" were not limited to American events.
Hence, the ECB yesterday took control of the tenth largest bank in Italy, Banca Carige, after most of the board members of the financial institution resigned. The European regulator has appointed three temporary administrators and a supervisory committee, thereby replacing the bank's board of directors. Banca Carige is one of the most troubled Italian banks that was already provided with assistance last fall worth 320 million euros from the Italian Interbank Fund. However, the bank failed to restructure and get rid of "bad" debts because of the inefficient management and the conflict of shareholders.
Fitch Ratings has lowered the bank's credit rating to CCC+ with a negative outlook, while warning that Carige could go bankrupt. As a result, the Italian National Commission on Companies and Stock Exchanges ceased trading in bank shares, as the board of directors was unable to reach an agreement on raising capital. This was the last straw for the majority of the members of the Board of Carige after which the leadership passed to the temporary administrators appointed by the European Central Bank.
Against this background, the German government bonds collapsed, especially the 7-year and 8-year bonds. Although, almost all were in the "red zone". The sharp collapse supplemented a very unambiguous fundamental picture, after which the yen, in tandem with the dollar, broke through many months of support in the area of the 104th figure. This impulse attracted buyers to itself. Therefore, the pair rebounded to the current mark of 107.70, but in my opinion, the southern dynamics still have not exhausted themselves.
After all, very soon another one will be added to the above fundamental factors of Brexit. Until March 29, that is, before the date of Britain's exit from the EU, there are only a few months left, so the tension in the markets on this issue will only increase. In addition, Nonfarm may further weaken the dollar against a basket of major currencies tomorrow. Therefore, the USD/JPY pair still has the potential to continue the downward trend to the nearest support level of 106.80 (the bottom line of the Bollinger Bands on the monthly chart).
The material has been provided by InstaForex Company - www.instaforex.com