JPY and gold in focus amid geopolitical risks

A short on EUR/JPY looks to be an attractive hedge against rising geopolitical risks, as increasingly worried investors move to safe haven assets.

Japanese flag
Source: Bloomberg

The Japanese currency extended its gains against major currencies after US president Barack Obama announced his authorisation of targeted airstrikes on Iraq, in an offensive against ISIS forces.

The yen was already being bid higher on due to other geopolitical concerns, particularly with the increased Ukraine-Russia tensions.

On Thursday, Russia retaliated to Western sanctions with import bans on a wide range of food and agricultural goods. It’s considering further tit-for-tat measures including air space restrictions that could affect international flights.

All these developments have heightened the atmosphere of uncertainty and weighed down markets further, which have been largely negative over the past week. This has seen strong support for energy stocks, oil and gold prices.

Zooming in on EUR/JPY, the pair has dipped below its 2014-low of 136.23 and looks set to test its next support level of 135.51.

The pair’s 50, 100, 200 daily moving averages are all aligned towards a downtrend. With the European Central Bank taking a dovish stance versus JPY’s safe haven status, the pair looks primed for further downside with rising geopolitical risks.

Gold prices have drifted higher and look set for a four-day positive streak, which has gain at least 2%, a three-week high of at least $1,314.50 per ounce.

Brent prices are on their way to end Friday’s session on a week-high. They rose 0.81% on Thursday and in today’s morning trade its up over 0.7% hitting $106.20 per barrel.

Investor sentiment has been weighed down by a week of subdued economic data.

This morning, Australia revealed another set of disappointing data. Home loans rose only 0.2% month-on-month, below market expectations of 0.6%.

This follows yesterday’s weak employment figures, where the unemployment rate climbed to a 12-year high of 6.4% in July from 6% the prior month. That’s even higher than the current US  unemployment rate and it’s the first time that has happened since 2007.

Earlier in the week, there were some signs of weakness from Chinese economic data. HSBC Services PMI came in at 50.0 – a nine-year low.

This suggested a slowdown driven by property-related activities such as agencies and residential services. Property slump concerns were also raised based on news that land parcel auctions in Beijing saw unsold plots for the first time in more than three years.

The weak indicators from Australia and China could see some downward pressure on the Australian dollar in the interim.

Another factor that could weigh down the currency further will be China’s trade data expected to be released today and growth is expected to be slower for July.

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