Pound to Yen (GBP/JPY) Exchange Rate Weakens as Investors Back Safe Haven Assets

July 17, 2014 - Written by Ben Hughes

STORY LINK Pound to Yen (GBP/JPY) Exchange Rate Weakens as Investors Back Safe Haven Assets

The British Pound Sterling to Yen exchange rate (GBP/JPY) fell by more than 0.30% against the Japanese Yen on Thursday as investors were spooked by news that the US has imposed harsher sanctions against Russia and as the conflict in Ukraine escalated further.

Adding to fears that the Ukraine crisis could escalate was the news that a Ukrainian security spokesman accused the Russian air force of shooting down one of its jets whilst it flew on a mission in Ukrainian territory.

Two Ukrainian jets were shot down yesterday with pro-Russian separatists claiming both strikes. The Ukrainian authorities also accused Russia of downing a high altitude flying transport aircraft earlier in the week.

Ukrainian officials however argue that pro-Russian separatist rebels could not have downed the planes because they lacked the necessary missiles needed to hit them at high altitudes.

The main cause for the increased demand for safer haven assets however came after the United States announced a new round of harsher sanctions against Russia as Washington grows impatient at Russia’s lack of attempts at deescalating the conflict.

The new sanctions target major Russian companies such as banks, energy firms and weapons manufacturers. The news increased investor jitters that the impact upon the Russian economy could have wider effects on the global economy as a whole and tip Russia into recession.

“The listed firms will find it difficult to attract financing for new projects, with the Rosneft and Exxon joint exploration in the Arctic being among the primary concerns. A much more severe impact comes from the signalling implications that have spill over effects for the general economy. Foreign banks in the US and Europe will become much more concerned about credit risk exposure to Russian enterprises, increasing funding costs and in some cases refusing to provide funding all together,” said Dmitri Petrov, an analyst at Nomura.

In reponse to the sanctions, Russian President Vladimir Putin said that relations with the U.S. are in danger of reaching a "dead end" and could damage U.S. business interests in his country.

In the heavy fighting between Pro-Western Ukrainian government troops and Pro-Russian Separatist fighters more than 1,000 civilians and combatants have been killed since the middle of April. Tens of thousands of people have forced to flee their homes.

Further sanctions are likely to be announced by the European Union in the coming days. These are expected to take the form of blocking loans to fund new projects in Russia and the European Investment Bank will suspend funding for Russian public sector and reconstruction works.

The Pound was also continuing to be weakened by yesterday’s disappointing wage growth data which reduced expectations that the Bank of England will choose to raise interest rates before the end of the year.

Average weekly earnings excluding bonus payments rose at an annual pace of just 0.7% in the three months to May, the slowest rate of growth since comparable records began in 2001, according to official data. Including bonuses, average earnings grew by an even worse figure 0.3%, due to higher bonus payments a year earlier. If weak wage growth continues then a rate rise is increasingly unlikely to occur.

The data took some of the shine off of a separate report which showed that unemployment in the UK fell to 6.5% in the three months to May.

GBP/JPY Update - 18/07/2014

The Pound Sterling (GBP) fell against the Japanese Yen (JPY) in Asian Trading on Friday after demand for safe haven assets increased following the news that a Malaysian passenger aircraft crashed in eastern Ukraine.

Speculation that the plane was brought down by a missile raised tensions between Russia and the rest of the world. The Yen then retreated after the Bank of Japan released dovish policy meeting minutes.

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