JPY: Risk-off support and policy uncertainty – MUFG

MUFG’s Head of Research Derek Halpenny notes the Japanese Yen (JPY) is starting to benefit as risk aversion rises and the US Dollar still leading G10 performance. He highlights that further safe-haven flows into US Treasuries could improve Yen performance, while persistent Middle East conflict may reduce the likelihood of an April BoJ rate hike and keep intervention risks alive near 160 level against USD.

Yen caught between risk-off and BoJ

"The US dollar remains the top performing G10 currency with the Canadian dollar the next best followed by the Japanese yen. If risk aversion continues to intensify and we begin to see more substantial safe-haven flows to the UST bond market, the yen is likely to be begin performing better."

"BoJ Governor Ueda has been speaking this morning in the Diet and did repeat the usual comment that the BoJ would raise the key policy rate if the economy evolved as the BoJ expected. However, there was obviously an added factor in determining the outlook for policy with Governor Ueda stating that the conflict in the Middle East could have a “significant impact on the global economy” and therefore the Japanese economy."

"Expectations of an April BoJ rate hike have held up reasonably well given current circumstances – a hike then is currently priced at 15bps versus 17bps last Friday. That will certainly come down we believe if the conflict persists as it would be difficult for the BoJ to hike in these circumstances."

"There is the added risk of yen intervention at weaker levels that could also discourage yen selling. Finance Minister Katayama today spoke of the “shared understanding” amongst G7 countries that currencies should move in a “stable manner” and given intervention in current circumstances would be easier to justify, the MoF would likely be encouraged on a move toward the 160-level."

"However, the scale of yen strength due to mass liquidation of yen short positions will be less given positioning has been lightened considerably prior to the conflict. As of last Tuesday, Leveraged Funds’ short yen position had been reduced to the smallest size since August last year."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)