Japan’s yen back in favour as a funding currency, but with more risks

Japan’s yen back in favour as a funding currency, but with more risks

CAD/JPY trading

CAD/JPY is trading up 0.39% at 91.214

As the Bank of Japan asserts its standing as a lone dove among its peers, the yen is reclaiming its status as the world’s most popular funding currency.

The trade comes with risks though, given the yen could revert to being a safe haven if tensions over Ukraine heighten or if an aggressive Federal Reserve triggers a markets selloff.

The yen’s conventional role as the cheap currency investors could borrow and use to finance ‘carry’ trades in higher-yielding markets was somewhat diluted during the coronavirus pandemic, as other central banks cut their rates to zero too.

But it is back as the favorite funding currency this week after the BOJ announced a special bond-buying operation to remind markets about its commitment to keep yields low for longer.

That stance is at odds with the Fed and central banks in Europe that have turned forcefully hawkish about inflation.

“And that’s an environment that has typically favored the yen as a funding currency for carrying trades.”

Some things haven’t changed for the yen. Japan has one of the weakest currencies among the Group of Seven nations, sub-zero short-term rates, and a domestic investor base desperately seeking returns abroad.

On technical fronts, CAD/JPY RSI stood at 61.27, and currently it is trading above all MA. So, the BUY position can be taken with the following target and stop-loss:

TRADE SIGNAL – : CAD/JPY – BUY: 91.206, TARGET: 91.280, STOP LOSS : 91.188

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