Yen gains as geopolitical tension weighs on currency markets

LONDON - 15 October 2018: The yen hit a one-month high and the Swiss franc gained on Monday as rising geopolitical tension and investor anxiety about the global economy left investors skittish at the start of the week.

Equity markets fell on worries the ongoing Sino-U.S. trade dispute is hitting China’s economy, while Saudi Arabian shares tumbled on rising tensions between Riyadh and the West after the monarchy warned against trying to punish it over disappearance of a journalist.

German Chancellor Angela Merkel’s Bavarian allies suffered their worst election result since 1950 on Sunday, in a setback that raised tensions within the country’s crisis-prone national government.

“I don’t think it’s a huge political risk, but it does tell you that political risks in Europe are not going away,” said Alvin Tan, a currencies analyst at Societe Generale.

Tan said the yen and franc, both considered safe-haven currencies that attract investors when markets are in flux, had benefited as equity markets dropped, although the moves were not huge.

The yen rose as much as half a percent to 111.69, its strongest since Sept. 18. The franc also rose versus both the euro and dollar, but the gains were limited.

The Australian dollar, often seen as a barometer of global risk sentiment, shrugged off the mood and rose 0.2 percent to $0.7128 against the dollar, suggesting investors were far from panicked. The Aussie had hit a two-year low of 0.7039 on Oct. 5.

The euro nudged higher to $1.1571 against the dollar, while the dollar traded flat against a basket of currencies.

Analysts said the euro’s fortunes would be determined in part by the Italian government’s annual budget, which the cabinet is due to approve later on Monday.

YEN STRENGTH

Analysts expect the yen to strengthen as a downturn in equities catalyses safe-haven demand for the yen.

“Our bias is that equities will remain under pressure this week, and thus see scope for USD/JPY to ease somewhat further towards the 110 level,” a research note from Mizuho Bank said.

U.S. Treasury Secretary Steven Mnuchin said on Saturday that Washington wants to include a provision to deter currency manipulation in future trade deals, including with Japan, based on the currency chapter in the new deal to revamp the North American Free Trade Agreement.

Japanese media ran front-page stories questioning whether that would give Washington the right to label as currency manipulation any future foreign-exchange market interventions by Tokyo to curb sharp yen rises.

Sterling dropped 0.2 percent $1.3121 after warnings that Brexit talks appear to have hit an impasse. The pound also fell 0.4 percent against the euro to 88.190 pence.