FxWirePro: EUR/GBP vs EUR/JPY currency swaps as geopolitical risks drives JPY volatility

The JPY nominal effective exchange rate first declined to mark a low since early-February on May 22, and in late May, the JPY crosses have rapidly risen amid Italian political turmoil and higher concerns of a trade war and momentarily halted for now.

While the risk sentiment has driven JPY lately, fundamentals provide a partial offset. First, our economists expect a pick-up in global growth led by the US. Firm global growth will likely secure an environment where JPY remains weak as a funding currency.

Also, Japan’s net outflow of FDI in 1Q was worth ¥3.6trn. This was 40% smaller than last year but still large in absolute terms (refer 1st chart).

And Japanese investors’ investments in foreign securities were firm from January to April (net purchase of ¥2.1trn foreign stocks and investment funds and ¥2.9 foreign bonds, refer 2nd chart).

Having said that, though Italian politics avoided a worst case, a slew of political events scheduled in coming weeks will still be important to JPY.

Relevant events include the US-North Korea summit (June 12), publication of the final list of Chinese imported goods on which the US will impose a 25% tariff (June 15) and the announcement of investment restrictions and enhanced export controls on China by the US (late June).

Sell 2M EUR/GBP vs. EUR/JPY corr swap, Monetizing re-emergence of idiosyncratic UK policy risk

Currency Strength Index: FxWirePro's hourly EUR spot index is inching towards -10 levels (which is neutral). Hourly GBP spot index was at shy above 97 (bullish), and JPY is flashing -68 (which is bearish) while articulating (at 06:33 GMT).

For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex

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