The Japanese yen gapped higher on Monday morning following the test of a hydrogen bomb this weekend by North Korea. The bomb was described on North Korean state media as being one of “unprecedentedly big power.”
With current sanctions against Pyongyang seemingly insufficient, in response to the latest provocation, US President Donald Trump said that Washington was considering cutting “all trade” with “any country” doing business with North Korea.
The weekend’s developments sent demand for yen soaring, which forced USD/JPY to 109.49 at the open, down from Friday’s close of 110.22. Other yen crosses also gapped lower, the most noteworthy being NZD/JPY, which opened at a three-month low (yen high) of 78.24.
Since the open, the yen has fallen, with markets making attempts to fill gaps in many of the major yen exchange rates. When last seen, a little after 3am GMT on Monday, USD/JPY and NZD/JPY were back trading in the high 109s and high 78s respectively.
Disagreement in USD/JPY Forecasts
Since March, USD/JPY has traded within an approximate range of 108.35-to-114.50. To regain some spark in this pair, most analysts agree that a break of either 108 or 115 is needed. With the yen holding firm amid continued North Korean provocation, it would be easy to suggest that, of the two, 108 will be the one to go. However, all too often the yen has flattered to deceive and for understandable reasons there is no consensus among the big banks on where it goes next.
The FX research team at Bank of America Merrill Lynch (BAML) said on Friday that they see USD/JPY trading down to 106.50 in the short-term, mainly on the back of geopolitical tensions, before rallying into year-end.
In contrast to BAML, Societe Generale believes that the yen weakens from here. In a note to clients this weekend, the bank had this to say:
“In the near term, a re-test of 115 in USD/JPY seems more likely than a decisive break below 108. Our bias is to be bearish the yen [yen cross rates will rise] against the AUD, CAD and EUR on a 3-to-12-month view.”
Against the dollar, Scotiabank see the yen little changed at year-end but do forecast significant yen appreciation against the euro. The bank’s official forecasts from late August put USD/JPY at 110 and EUR/USD at 1.13 by December-31, implying a EUR/JPY exchange rate of 124.30, which would mark an increase of nearly 5% in yen buying power from Monday’s EUR/JPY exchange rate of 130.45.
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