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James Hyerczyk
Japanese Yen

The Dollar/Yen is posting a loss on Monday but well off its low after a gap-lower opening earlier in the session in reaction to a geopolitical event over the week-end. After clawing back most of its earlier loss, the Forex pair is now hovering near its high for the day after aggressive buyers filled in the earlier gap.

At 07:55 GMT, the USD/JPY is trading 107.849, down 0.240 or -0.22%.

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The Forex pair opened sharply lower early Sunday as investors took protection in the safe-haven Japanese Yen after a sharp rise in crude oil futures raised concerns about the health of the global economy. Not only were investors seeking shelter in the Japanese Yen, but they were also shedding risky assets. It was more or less a textbook reaction to the unknowns that usually following a dramatic geopolitical event.

The catalyst fueling the reaction in the financial markets and the Japanese yen was the drone attack on Saudi Arabia that shutdown production at two of the country’s major facilities. International-benchmark Brent crude oil futures jumped nearly 9% on the news and U.S. West Texas crude oil rallied close to 9% higher before prices retreated close to last week’s high.

Despite the price action, traders remain on heightened alert with some suggesting the aggressive moves over the week-end will force crude oil traders to put build a risk premium into the market. Additionally, the situation in the Middle East, especially the relationship between the U.S. and Iran, remains “hot”.

Dollar/Yen traders are likely to continue to watch and react to the price action in crude oil and the stock market until Saudi Aramco, the national oil company, reports that the facilities are up and running without any further loss of production expected.

In the meantime, President Trump calmed the markets when he authorized the release of oil from the Strategic Petroleum Reserve (SPR) to keep the markets “well-supplied.” It apparently worked to ease tensions because crude oil prices retreated after the move, demand for risk returned and Dollar/Yen short-sellers posted a dramatic intraday reversal.

Daily Forecast

Although the price action in crude oil and the USD/JPY suggests the markets have stabilized, it’s probably a good idea to continue to monitor the situations in the Middle East. The first situation to watch closely is between Yemen and Saudi Arabia. The second is the chatter between the U.S. and Iran.

Yemen’s Houthi rebels claimed responsibility for the attack, but the United States believes Iran was behind the moves. There could be further attacks, which would lead to increased demand for the safe-haven Japanese Yen.

Secondly, Trump saying there is reason to believe the U.S. knows the culprit and is “locked and loaded,” while waiting to get the verification from the government to proceed, suggests there may be retaliation from the U.S.

Any escalation in the tensions in the region will send the USD/JPY sharply lower. However, if calm breaks out and crude oil prices return to last week’s levels then look for further upside action in the Dollar/Yen.

Basically, don’t be surprised by a choppy, two-sided trade in the USD/JPY until traders get more clarity about the situation in the Middle East.

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