FX Viewpoint | JPY not winning the “safe-haven” race | Article – HSBC VisionGo
- The JPY is an anti-cyclical and “safe-haven” currency and should outperform against slowing global growth momentum
- However, it is also highly sensitive to the Fed’s impending policy normalisation, overshadowing its “safe-haven” allure
- USD-JPY is likely to remain roughly stable before slowly grinding higher in 2022, in our view
Against a backdrop in which global growth momentum is slowing but the Federal Reserve (Fed) is turning less accommodative nevertheless, the JPY is likely to be pulled in two different directions.
Both JPY and USD are “safe-haven” currencies, but USD-JPY is highly sensitive to rising short-term US yields
On the one hand, the JPY is an anti-cyclical “safe-haven” currency, like the USD is. Anti-cyclical currencies tend to underperform during global cyclical upturns and outperform during periods of slowing economic growth momentum. Hence, slower global growth and weaker risk appetite should drive the JPY stronger. But, on the other hand, the JPY is very sensitive to rising short-term US Treasury yields (see chart below) which reflect market expectations of changes in the Fed’s monetary policy. The JPY is a very low-yielding currency, thereby being highly susceptible to depreciation amid rising US interest rates.
The JPY may not be as good a “safe haven” as the USD when weaker risk appetite is partly due to expectations of the Fed’s policy normalisation
We believe the JPY’s sensitivity to US yields is likely to overshadow the JPY’s role as a relative “safe haven” at least when measured against the USD, which has a similar risk personality. In other words, the JPY is not a better “safe-haven” currency than the USD when the USD has the added advantage of US growth sufficient to have the Fed on a path towards monetary normalisation.
We expect the JPY to outperform many other currencies going forward, but not necessarily the USD
Going forward, we expect the JPY to outperform many other currencies, but not necessarily the USD. We see USD-JPY remaining roughly stable for the rest of the year, before slowly grinding higher in 2022 once the Fed’s tapering commences and the focus switches to its policy rate’s lift-off next. External factors drive our view on USD-JPY, but we note that several domestic factors are suggesting that there is no need to be too bearish on the JPY. For example, the Bank of Japan’s balance sheet is already in the midst of tapering and Japanese residents’ portfolio outflows have slowed.
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This report is dated as at 27 August 2021.
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