On Friday, the Nikkei closed lower amid geopolitical tension across the globe. There wasn’t just one, but two incidents that came about. The Nikkei also dropped as the yen surged higher. Data from the U.S. sparked some hope that global growth is still doing well. The Nikkei dropped 0.49% to 18,335.63.
Geopolitical Problems
There were two geopolitical problems that really spooked the Nikkei. The first of which was the U.S. dropping the largest non–nuclear bomb, nicknamed the "mother of all bombs", on ISIS targets in Afghanistan. It was believed that there were about 94 ISIS fighters that may have been killed by the blast. The reason for using the bomb was to destroy underground tunnels and weapons used by ISIS.
The second geopolitical problem involves an escalation between the United States and North Korea. The main issue is that North Korea is building a rogue nuclear program, and has been doing a series of missile tests. The U.S. has expressed concerns with this issue. It is pushing North Korea to abandon its missile program completely. What do both of these geopolitical events have to do with the Nikkei? The fear is that one or both of such conflicts could cause a war. If that happens, a war would cause mass panic. That means traders would fade the Nikkei lower.
Higher Yen
With all the risk factors around the globe, the yen traded higher. In addition, the dollar was trading somewhat flat as well. That really helped the yen edge higher. The USD/JPY pair traded to 108.92 on Friday, indicating a stronger yen currency.
The yen had really recovered from its low at the beginning of the week versus the dollar. At the beginning of last week the USD/JPY pair traded as high as 110. That meant that early last week, the dollar was much stronger. Towards the end of the week the yen made a remarkable recovery. It could be because the yen is considered to be a safe haven currency asset. With all the global problems around the world, traders rushed to buy as much yen as they could buy.
Good Data
What may have kept the Nikkei from completely falling apart was the positive data that came from the United States. The U.S. released weekly jobless claims data that beat expectations. It reported that there were only 234,000 weekly jobless claims for unemployment. That was below the expectation that 245,000 would file for benefits. There were two good things about this reported data. The first of which is that it was the third straight weekly decline in filings.
The second is that it was very close to the 44 year low seen in February with a total of 227,000. Even though this is U.S. data it plays into the overall global economy. The Nikkei doesn’t just trade based on its own economy. The reason for that is because a lot of countries trade with one another. A weakened U.S. economy could potentially mean less imports being sent from Japan.
What Traders Should Watch For
The first is how these geopolitical problems play out. That is because further escalation of either situation will likely lead the Nikkei lower. Such issues will drive buying away from the Nikkei. The second item would be the yen. As the yen has an inverse relationship with the Nikkei, it is important to watch. When the yen traders higher, as in this case, the Nikkei tends to sell off.
The final item that traders should keep an eye on would be global data. The bullish U.S. data is probably what kept the Nikkei from tanking as much as it did. As long as the data from the U.S. remains strong, then global growth worries won’t be recognized as much.