Fear of the spreading COVID-19 outbreak in China has turned the yen from a haven asset to a liability.
The Japanese currency this week has slumped about 2 percent against the US dollar to its weakest in 10 months, even as traditional havens gold and Treasuries pushed higher. As new cases of the virus mount, the impact of COVID-19 on supply chains and demand is pummeling Japan’s economy, already under pressure after last year’s sales-tax hike.
The US dollar and yen has traditionally enjoyed a close relationship with yields on US Treasuries — the financial market’s ultimate risk-free asset — especially during periods of market stress.
This time, that is not happening and the 60-day correlation between the two has fallen to the lowest since December 2018. The benchmark 10-year US yield fell to a five-month low this week, but the US dollar-yen’s move in the opposite direction suggests little haven demand for Japan’s currency.
“The yen is being sold because the Japanese economy is already weak due to the effect of the tax hike in October,” Nissay Asset Management Corp chief analyst Toshiya Matsunami said. “And the economy is expected to get even weaker.”
Currency sell-offs were not limited to the yen in Asia. Peers in Singapore and South Korea also slid as new cases of COVID-19 jumped and concern mounted that the outbreak would hurt their trade-dependent economies.
Meanwhile, with Asian governments and central banks hinting at the possibility of extra stimulus to counter the virus’ effects, speculation is growing on a potential response from the Bank of Japan.
Bank of Japan Governor Haruhiko Kuroda yesterday said that additional easing is not necessary yet, although he would not hesitate to act if needed.
“A recession seems all but inevitable,” ING Groep NV strategists Francesco Pesole and Petr Krpata wrote in a research note on Thursday. “Accordingly, markets are starting to speculate about the Bank of Japan’s actions in terms of monetary stimulus, which is contributing to an even less attractive rate environment for the yen.”
The slump in the yen has been made worse by a surge in demand for the dollar as a higher-yielding haven currency. The potential for the US economy to outperform and the sheer distance between the US and the heart of the outbreak in China has helped the greenback push higher against both major peers and most emerging-market currencies so far this year.
“The dollar is reclaiming its original status of a haven currency,” Matsunami said. “The US economy is the strongest among developed markets and the impact from the coronavirus is seen as limited.”
Perhaps the clearest indication the yen has been kicked out of the safe haven club, at least for now, is its relationship with gold. It is sitting at a seven-year high on renewed concerns about the global economic impact of COVID-19.
Gold has surged almost 7 percent so far this year, while the yen has fallen 3 percent against the US dollar, breaking through the 112 level for the first time in almost a year on Thursday.
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