The Trump rally in the financial market continues with the stock market at record levels and interest rates gradually rising.

In the foreign exchange market, however, it is the U.S. dollar (USD) that has tapered off first from the beginning of this year, and then more recently with money flowing somewhat back into the European currencies.

There are, however, a couple of currencies that continue to be weaker than the USD, especially over the past week, and one of them is the Japanese Yen (JPY). In fact, out of all the major currencies, the JPY has been the weakest performer since Trump’s victory in early November, having weakened about 8 percent since then.

The past week’s fall of the JPY may have been triggered by political factors – most notably the tension with North Korea’s ongoing missile tests – but also the ongoing concerns over the French election and of course the Middle East. But the majority of the JPY selling is happening against the USD, where investors are still in a ”risk-on” mode.

The JPY is a good benchmark in determining the risk appetite of global investors. While the JPY has the lowest interest rates in the world and Japan also has the largest budget deficit per GDP in the world, most of it is funded by the Japanese themselves. The super-low interest rates in Japan should repel anyone from holding this currency, but when there is too much uncertainty and fear in the market, the Japanese bring their money back to their country because the private sector becomes ultra-conservative and wants to preserve cash, hence the JPY strengthens into what we call a “risk-off” mode.

On the other hand, when investors are willing to take more currency risk and invest in higher-yielding currencies, then the JPY weakens. Given the vast liquidity of Japanese investors, and given the likely higher interest rate environment in the U.S. going forward compared to the rest of the world, Japanese investors still favor putting the majority of their money into USD for these so-called ‘carry trades’.

Our View: The fact that the JPY is still weakening means that the ‘risk-on’ mood is ongoing, even though the U.S. dollar index has taken back a lot of its gains since Trump’s election last year.  This coincides with the ongoing bullish stock market sentiment and rising interest rates in the financial markets.  That being said, this is not a particularly overwhelming trend and so while the JPY may weaken for another 1~2%, from here, if and when the JPY starts reversing and strengthening, it may be a pre-cursor to the Trump rally finally coming closer to an end.

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