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Author: Alan LittleDate: 2020-07-13

Bullish outlook for ¥ JPY at expense of commodity-linked economies

The Japanese yen ¥ (JPY) could rise if the increase in coronavirus cases results in greater demand for anti-risk assets, especially in the world’s largest economy, the US.

Attempts to control the spread of the virus could see lockdown measures extended or reintroduced, potentially hindering or slowing growth and global economic activity.

However, the yen could also extend gains if earnings from corporate gains such as Blackrock, Goldman Sachs, Wells Fargo and other high market-cap businesses fail to reach their earnings estimates.

Following the global equities sell-off in March, stock markets have bounced back with new vigour, resulting in questionable asset prices that could be made unjustifiable by poor earnings.

One of the most resilient categories has shown to be technology-oriented stocks.  Alphabet Inc (GOOGL), Amazon (AMZN) and Apple (AAPL) have increased by more than 40%, 93% and 60% respectively since 16th March.  As these companies carry a disproportionate weight in major US equity indices, these results could merely be covering up the ill health of smaller cap businesses.

These companies, too, are facing difficulties in what is the nation’s worst economic downturn since the Great Depression of the 1930s. This means that a number of reports of underwhelming earnings could end up shattering this illusion of growth and cause a pullback within large equity indices. If this happens, the (¥) yen could well appreciate when placed against many of its G10 peers, particularly those that are inextricably connected to commodity-linked economies.

These economies include the likes of the Norwegian krone (NOK), the Swedish krona (SEK) and the Australian (AUD), Canadian (CAD) and New Zealand dollars (NZD).

Similarly, following the 6th March OPEC meeting, where a consensus on the production of crude oil prices failed to be reached, both Russia and Saudi Arabia saw their prices plunge, causing problems for other assets as well.

However, the geopolitical aversion to risk permeated throughout numerous markets, resulting in a spike for the Japanese Yen against many of its peers.

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