Persistent global growth concerns and ongoing headlines that the world economy has approached another downturn suggest that there is limited upside to world stock markets. Investors have certainly become nervous that the world economy is at a crossroads and that the risks associated with the uncertain external backdrop of multiple headwinds are impacting economic sentiment in a negative direction, meaning that the case to keep close to safe haven instruments during the second quarter remains compelling. Both Gold and the Japanese Yen are two assets that have historically shown an ability to benefit from market uncertainty and I see the potential for the Yen to benefit in Q2.
Election risks in emerging markets not only limited to Turkey
Away from global economic concerns that will remain in the conversation for a long time to come, what can also be looked upon for potential support in the Yen and other safe havens are the number of election risks to take place in emerging markets. Elections are scheduled throughout a wide range of developing markets this year, but the next couple of months will see markets like the Philippines, Indonesia and South Africa go to the polls. Elections in both developed and developing markets in recent times have concluded with unexpected outcomes and when you consider how much foreign investor capital is kept in emerging markets, investors might adopt a more conservative tone towards their investments until the outcome of these event risks become clear.
We have already seen in the run-up to the local elections in Turkey at the end of March what impact political risks can have on the Turkish currency and in turn, contagion fears for other emerging markets. I will not be surprised if investors use upcoming emerging market election risks as a reason to remain close to instruments like the Yen and Gold over the coming quarter.
US-China breakthrough would be welcome news for USDJPY bulls
While there is no shortage of pessimistic opinions on the global economy increasing in volume, the contrarian would speak out that in spite of all the negativity, there are some potential lifelines that can help lift market sentiment.
The prime contender for improved risk appetite would be a successful conclusion to the ongoing US-China trade negotiations, where optimism does remain that a signing summit between President Trump and senior Chinese officials will be called at some point during the second quarter. Skepticism over what exactly the potential signing summit unveils will be there, but the finer details of what is potentially going to be signed should not matter for investors.
All those in the market will want to know is that bilateral relations between the United States and China are improving after what has been nearly a year of protracted headlines and uncertainty in the market.
Dollar to pick up support if global fears accelerate
One important element that potential USDJPY buyers will refuse to rule out, is that if a global economic downturn does materialize, this can be supportive to USD demand.
We already see the roots of this trend beginning to appear at the end of March with the USD picking up momentumdespite the Federal Reserve making a spectacular U-turn on the monetary policy outlook in the United States. Even if the United States economy gets caught in the headwinds of global health fears, it would not be a surprise if the Dollar remains in demand over the course of Q2.
I personally doubt that the USDJPY may not be able to rise above 112 any time soon unless Dollar demand goes into hyper mode, however a steady USD will help draw a line in the sand for USDJPY support.
Technical pictures points to ongoing tug-of-war
In regards to the technical picture, the USDJPY experienced a rebound during the first quarter of 2019 following the famous flash crash that kicked off the year, with prices eventually managing to push back above the 110 level.
The currency pair remains in a bearish channel on the monthly timeframe, with 110.00 acting as a pivotal point. If this level proves to be reliable support to prevent further selling, the next key point of interest for the USDJPY will be around 112.00.
However, a breakdown back below 110.00 risks the downtrend in the USDJPY resuming and likely testing 107.30 and 106.00.
While USDJPY may notbe able to rise above 112.00 any time soon, a possible break above this point will open doors towards 113.00 and 115.00.
