Yen vs the NZD: What Volatility Means for the Markets

2017 has proven to be a rather turbulent year in regards to the currency markets and it seems as this final financial quarter shows no sign of slowing down. Many analysts are now focusing upon the rather tenuous relationship between the Japanese Yen and the New Zealand dollar. What recent movements have occurred, what changes may be on the horizon and what might we expect to observe in the near future? Let's take a look at the current situation in order to gain a broader understanding of this sector as a whole.

The Relationship Between the Yen and the New Zealand Dollar

It is first critical to take into account the risk-averse nature that seems to be taking hold within these marketplaces. Traditionally speaking, the JPY has always represented a low-yielding currency. This essentially means that traders will often borrow the cheaper yen before purchasing currencies associated with higher yields such as the New Zealand dollar. Such ‘carry trades’ are often preferred during times of optimism and avoided when global market conditions appear to be stressed. So, why are we now witnessing a fall in the NZD and perhaps more importantly, what could this short-term movement signal for medium-term traders?

The Role of Commodities

It is no secret that commodities are valued in dollars. It therefore stands to reason that a bearish outlook in terms of these futures will signal a drop in the value of the greenback and a greater interest in the relatively risk-averse nature of the yen. This observation seems to gain credence due to the fact that 1 NZD is (currently) equivalent to approximately 76 Japanese yen. These figures are in stark contrast to the nearly 79 yen that equated to the New Zealand dollar less than one month ago.
Indeed, senior analysts such as Michael Hewson at CMC Markets observe that:
"Another thing that has been particularly noticeable is that commodity currencies have been particularly weak in the past few weeks, with the Australian, Canadian and New Zealand dollar all falling heavily, while the recent rebound in the Japanese yen also suggests a market that is becoming more risk averse." This leads one to question what additional factors may be attributed to this paradigm shift?

Fiscal Concerns Within the United States

In terms of the proverbial elephant in the room, the role of the Trump administration is continuing to place downward pressure upon the dollar as a whole. One recent development involves the hint that special prosecutor Robert Mueller is beginning to peel back the layers of the Trump presidency in relation to suspected Russian meddling during the 2016 election campaign. Such a move could hint at continued political instability and thus, we may witness the dollar pull back even further.

Another worry is that any type of expansionary fiscal policy may no longer be on the Trump docket. Indeed, it seems that his recent spate of Tweets has once again called into question his role as an effective leader; at the very least from the point of view of an adept mediator.

Finally, investors are keeping a close (albeit wary) eye on current tax reform legislation occurring within the United States. We also need to take into account the possibility that an accord will soon be reached in relation to the current Brexit negotiations. These have likewise had a dampening effect upon the value of the dollar.

What Might the Future Markets Hold?

This question is understandably on the minds of many investors. In regards to any short-term changes, few are on the horizon. There is not much news in store for the near future. This is likely to cause such a risk-averse sentiment to remain in place. Looking forward towards the forthcoming year close, it is not probable that we will witness a sizeable reversal in regards to the NZD/JPY relationship. In the same respect, it could very well be possible that we witness a trend reversal if dollar-backed sentiment begins to rise. Still, it is likely that the NZD will remain in the relative doldrums for the time being.

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