Jane Foley, Research Analyst at Rabobank, notes that the USD/JPY is trading back at levels last seen in late 2014 and the strength of the yen in addition to yesterday’s downward push in treasury and Bund yields are all suggestive of risk aversion. Key Quotes “Following a recovery in risk appetite from the middle of February which reportedly drew USD36.8 bln into emerging market stocks and bonds in March (the highest monthly inflow for nearly two years), it seems that investors have become wary of over-extending their positions. Yesterday’s poorer than expected US international trade data triggered a round of downward revisions in US Q1 GDP forecasts and this has drawn attention to a number of reports suggesting that Q1 earnings report could highlight that corporate profitability is struggling to grow. While the factors cited above help explain the yen’s recent strength it is still difficult to explain why the JPY did not weaken in late February and into March when the dovish commentary from the Fed’s Yellen ensured a swift drop in other indicators of risk aversion such as the VIX. The persistent strength of the yen through late February and March may simply reflect a desire of many investors to hedge themselves against the risk of another sharp drop in the value of risky assets. The fact that yen strength threatens to extend the BoJ’s battle with disinflation pressures needs no explanation. As a consequence of this, over the past couple of months yen strength has heightened the discussion as to whether the BoJ will be tempted to intervene. Currently the WSJ is running a report that PM Abe is of the view that countries should avoid seeking to weaken their currencies with ‘arbitrary intervention’. Since it is the MoF not the BoJ that is responsible for yen policy, this is a strong message. It is in tune with the standard mantra of the G7 and also with the rumours (discussed here yesterday) that the US authorities may have pressured other central banks at the recent G20 meetings to avoid causing more USD strength. While we see a discussion about avoiding escalating currency wars as more likely, either way is likely that any intervention by the Japanese would be frowned upon heavily. The chart shows that last year, the BoJ’s measure of Japan’s effective exchange rate reached its lowest level since 1973. While corporate Japan may not welcome recent yen strength, the value of the yen is undervalued on many measures. Without the perceived risk of intervention, there is risk that USD/JPY could tick lower near-term.” For more information, read our latest forex news.