Yen May Recoil from 15-Month High on Yellen Pre-Positioning

Talking Points:

Yen soars to 15-month high, Aussie drops amid risk aversion in Asian trade
Sentiment slump likely reflects returning 2016 FOMC interest rate hike bets
Pre-positioning for Yellen testimony may reverse overnight risk-off moves

The anti-risk Japanese Yen soared to a 15-month high while the sentiment-geared Australian and New Zealand Dollars declined as risk aversion carried over from Wall Street onto Asian stock exchanges. The MSCI Asia Pacific regional stock benchmark index is on pace to issue its largest daily decline in three weeks having dropped over 2 percent.

We pointed to the likelihood of risk aversion at the start of the year in our 2016 fundamental forecast. The Fed’s aggressive easing effort over the past seven years slashed returns on safer assets and encouraged a reach for yield outward along the risk spectrum. The start of the Fed’s tightening cycle has triggered portfolio adjustment flows reversing this dynamic.

Within this context, the risk-off push since the start of the trading week seems to reflect follow-through on the release of January’s US employment data. While payrolls numbers trailed forecasts, the unemployment rate unexpectedly declined and wage growth impressed on the upside.This seemed to rekindle Fed rate hike speculation (as we suspected ahead of the release).

Looking ahead, a quiet economic calendar in European and US trading hours is likely to allow sentiment trends to remain in the driver’s seat. S&P 500 futures are pointing lower, hinting that overnight trading patterns are set to continue.

Pre-positioning ahead of Wednesday’s much-anticipated Congressional testimony from Fed Chair Janet Yellen may trigger an intraday reversal however. Traders are unlikely to want to be over-extended on either side of the risk sentiment spectrum ahead of the commentary. A move toward neutral in the context of recent selling is likely to boost higher-yielding FX like the Aussie and Kiwi while punishing the Yen.

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