FX Spotlight 2 Dec 2021 | JPY outperformance amid Omicron concerns | Article – HSBC VisionGo

JPY outperformance amid Omicron concerns
Finance  ·    ·  6 mins read

  • The JPY has been the best performing currency over the past five days amid Omicron concerns…
  • …a decline in longer-term US yields, a sharp decrease in oil prices, and positioning helped to a certain extent
  • Global risk appetite looks set to become more unstable in 2022e, supporting the JPY from time to time, in our view

The JPY outperformed in the past five days amid Omicron worries

During the past five days (from 25 November to 2 December), amid heightened concerns over the Omicron variant, the JPY has been the best performing currency in the world, gaining 2% against the USD (source: Bloomberg, 2 December). Compared to the other times earlier in the year when the VIX index (i.e., a financial benchmark designed to be a market estimate of the expected volatility of the S&P 500 Index) also spiked and US equities plunged (e.g. in mid-September, mid-June, late-February, and late-January), the JPY’s behaviour this time around was more normal – it outperformed all currencies, including the USD

There are a few differences from the previous episodes of risk aversion: 

  1. Longer-term US Treasury yields fell this time around. The JPY has a consistently stronger correlation with 10-year US Treasury yields than with 2-year ones. 
  2. Oil prices fell sharply this time around too. Japan’s trade balance recently fell into a deficit (USD4bn on average per month in August-October, flipping from an average surplus of USD3.2bn in the previous 12 months) because of high energy prices (source: Bloomberg, 2 December). 
  3. Positioning seemed more skewed towards long USD-JPY this time around, apparent from Commodity Futures Trading Commission (CFTC) futures data and residents' portfolio outflows. Residents bought USD60bn worth of foreign bonds between early September and mid-November, the most on a rolling 3-month basis since late January. 

Concerns about slowing global demand momentum and the Fed’s policy normalisation are more likely to materialise in 2022

While we see the USD appreciating further in 2022e, we believe there will be opposing forces supporting the JPY from time to time too. COVID-19 uncertainties aside, global risk appetite looks likely to become more unstable in 2022e, considering that the OECD leading indicator for the global business cycle has already peaked in 3Q21 and with the Federal Reserve expected to accelerate its policy normalisation.

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