EUR/JPY finds cushion near 165.00 while safe-haven demand of Yen remains firm
- EUR/JPY gains temporary ground near 165.00 after a sharp sell-off earlier in the day.
- Tensions between Iran and Israel have increased the safe-haven demand of the Japanese Yen.
- Investors will pay close attention to the BoJ’s monetary policy announcement on Tuesday.
The EUR/JPY pair finds temporary support near 165.00 during late Asian hours on Friday after a sharp sell-off earlier in the day. The pair slumped as tensions in the Middle East region increased demand for safe-haven assets such as Japanese yen (JPY).
Early Friday, Israel launched a series of attacks on military bases and nuclear facilities in the northeast of Iran’s capital, Tehran, aiming to restrict Iran's economy from building nuclear warheads. Israeli Prime Minister Benjamin Netanyahu has stated that the war will would take “many days” and their military is preparing for any retaliation from Iran.
Meanwhile, United States (US) President Donald Trump has stated during Asian hours that Iran “cannot have a nuclear bomb”, while reiterating his hopes for a peaceful end to the tensions.
On the domestic front, investors await the Bank of Japan’s (BoJ) monetary policy announcement on Tuesday. The BoJ is expected to keep interest rates steady at 0.5% as officials have stated that the US tariff policy has prompted growth concerns in the near term. However, they are confident that the underlying inflation is on track to return to the 2% target.
Meanwhile, the Euro (EUR) exhibits a mixed performance on Friday as European Central Bank (ECB) Vice President Luis de Guindos has expressed concerns over economic growth amid trade war risk. “The economy had proven resilient but faced a number of risks, such as tariffs, that could curb growth,” Guindos said on Thursday.
On the monetary policy front, ECB officials have signaled a pause in the monetary easing cycle. ECB board member Isabel Schnabel said on Thursday that the monetary easing cycle is “coming to an end” as “medium-term inflation is stabilizing around target”, Bloomberg reported.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.