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JPY: Renewed weakness in oil prices reinforces risk aversion - MUFG

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Feb 24, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    Lee Hardman, Currency Analyst at MUFG, suggests that the yen has continued to strengthen modestly in the Asian trading session supported by more risk-averse trading conditions.

    Key Quotes

    “Global investor risk sentiment was undermined in part yesterday by renewed weakness in the price of crude oil following bearish comments from the oil ministers from Saudi Arabia and Iran. Saudi oil minister Ali al-Naimi stated that a lack of trust between the world’s biggest oil producers meant a cut in production “is not going to happen”. He does not expect many countries to deliver even if they say they will cut production.

    In the absence of co-ordinated action the rebalancing of supply and dampen will be left to the market and warned that cutting low cost production to subsidise higher-cost supplies only delays the inevitable. Saudi Arabia hopes other big producers will agree to freeze production when they meet again in March. However, comments yesterday from Iran’s oil minister Bijan Zanganeh has cast doubt on the potential effectiveness of the agreement. He stated that the push for a production freeze was laughable. The developments support our view that the recent rebound for crude oil related currencies is built on shaky foundations.

    The reversal of yen weakness is also a reflection of the loss of investor confidence in Abenomics policies. A Moody’s report released overnight has cast further doubt over the potential effectiveness of the BoJ’s recent announcement to implement negative rates. Moody’s stated that negative rates “will not lead to rapid revival in Japan’s household and business lending and, by extension, domestic demand growth”. They cited that evidence from Europe’s negative rate policy which points to “limited pass-through to Japanese households and corporates”.

    Negative rates have even failed to weaken the yen highlighting the diminishing negative impact of further BoJ easing. Moody’s views negative rates as credit negative for Japan’s banks and life insurers as it will encourage them to invest excess funds into assets with higher risk and/or lower liquidity. However, they do not expect a large reduction in banks’ margins because negative rates only apply to additional deposits at the central bank.”
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