Central Banks Are Extending Influence, And Impacting Markets


It goes without saying that there are many reasons to feel nervous in the current market climate, and the Invesco CurrencyShares Japanese (NYSEARCA: FXY) has quickly reversed prior gains to produce losses of -4.3%. However, recent central bank activities make it look as though the general public might be less fearful than global policymakers themselves, and this could help support the value of traditional safe-haven assets going forward. Unfortunately, these changes in sentiment appear somewhat inevitable, given the magnitude of the coronavirus situation and the extent to which central bankers seem to be willing to extend stimulus programs. If this turns out to be the case at the global level, downside moves in FXY could remain limited because the potential for gains has grown in strength.

Chart Analysis: Author

In spite of these recent price movements in the valuation, long-term term inflows suggest these activities are likely to reverse relatively soon. Over the longest available time frames, the bulls still remain firmly in the driver’s seat because investors have generated inflows of $66.2 million in the last year. This brings FXY inflow totals to $112.9 million over the last three-year period and $102.2 million over the last five-year period. These figures indicate fundamental trends that are very decisive in nature. Short-term price moves in FXY seem to be indicating otherwise, but traders must remember that the most of the momentum in the market is still focused in the bullish direction.

Source: ETFdb

Additionally, GDP rates have maintained stability in Japan and this is an economic trend that has been in place for roughly four years. Fortunately, these trends created some additional breathing room for the Japanese economy to absorb economic disruptions that will be seen leading up to the coronavirus aftermath.

Source: Trading Economics

However, there are still certain economic factors that could create a potential wildcard when defining the outlook. Japan’s trade balance figures would be a primary example of this type of variable due to its wide-ranging volatility (which was occurring even before the coronavirus health scare). Japan’s most recent economic figures were positive in these areas. But it would seem that an export-driven economy will need to see these numbers sustain themselves, even while specific events (such as various global travel bans) create major economic disruptions globally. This is one area of Japan’s economy that I will continue to watch because deeply negative changes in the country’s trade balance figure is one example of a data report that could have a significant impact on the potential for FXY to stage a recovery after recent declines.

Source: Trading Economics

When we combine all of this fundamental trend activity with the increased volatility and large price declines, it looks as though traders will see decent turnaround prospects for FXY as a safe-haven instrument for currency markets. From my perspective, the main area of potential concern will be found in Japan’s erratic trade balance figures. This part of the country will need to show stability in order for sentiment among foreign exchange traders to remain positive. If this is ultimately the case, FXY might actually work as a strong buy on value and the potential to work as a long-term safe-haven in what are still very uncertain markets.

Unfortunately, the dramatic actions of the world’s central bankers will not do much to alter the long-term sentiment of the market in cases where the economic data fail to support the stated outlook. The extent of the world’s upcoming stimulus programs is still unknown, so it’s important for investors to remain focused on the key economic data reports in order to determine whether reversal prospects for FXY remain viable.

Thank you for reading.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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