Yen’s safety status at risk from corona rates collapse

The growing threat to the yen has left worried investors searching for alternative asset havens. (AFP)
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Updated 01 October 2020

Yen’s safety status at risk from corona rates collapse

  • Trend shift seen as good for Japan, headache for ECB

LONDON: The coronavirus epidemic — and the collapse in global interest rates it has sparked — may have blown a hole in conventional market wisdom that Japan’s yen strengthens during crises, triggering a warning bell for investors.

The yen has long been among the assets in greatest demand during disasters, when waves of overseas-held capital traditionally flee back to Japan, pushing the currency higher.

And for more than two decades, the trend has held.

Since 1997, a 5 percent fall in the US S&P500 index was accompanied 76 percent of the time by yen appreciation, according to a study by Nordea.

In mid-March, when the pandemic shock was at its height, that didn’t happen. US equities tumbled 9 percent and 15 percent in successive weeks, but the yen fell, too. In subsequent selloffs, including this month’s 4 percent equity slump, the currency has barely budged.

“The correlation with stocks didn’t hold during the corona crisis, which is a game changer as to how everyone looks at the yen,” Andreas Steno Larsen, chief global FX strategist at Nordea Markets, said.

The inverse 90-day yen-S&P500 correlation has since weakened to near decade-lows, he noted.

Between Jan. 20 and Sept. 9, the yen firmed 2 percent against a basket of major currencies, State Street calculates — a stark contrast with its 27 percent surge during the 2008 crisis.

Any lasting shift carries profound implications.

For Japan’s export-reliant economy, having frequently contended with sudden yen spikes, it is a positive. Investors though, face a hunt for other havens, should the yen lose that status.

It is a source of unease for investors such as Aaron Hurd, senior currency portfolio manager at State Street Global Markets, who uses the yen as a counterweight to risky assets in some investment models.

While Hurd doesn’t believe the yen has shed its safe-haven role, he said its gains during recent risk-off episodes had been “a bit disappointing” and needed monitoring.

The yen’s reputation stems from Japan’s stash of foreign assets, at $3.5 trillion the world’s largest international investment position. But it is also linked to a well-established market trend — the carry trade, where low-yield currencies are borrowed and then sold for higher-yield assets overseas.

That makes the yen prone to periodic spikes; when world markets go into reverse, so do carry trades, fueling a rush back into the funding currency to limit losses.

But yen-funded carry trades declined to around 8 trillion yen ($75.5 billion) in July, estimates Tohru Sasaki, JPMorgan’s head of Japan market research, down from a steady 10 trillion yen or so in recent years and a 2007 peak around 23 trillion yen.

What has changed is that this year’s worldwide collapse in short-term rates has eliminated the yield discount the yen has held since 1995, when Japanese benchmark rates fell to 0.5 percent.

Oliver Brennan, macro strategist at TS Lombard, said Swiss and euro zone interest rates were below Japan’s, so “if yen shorts from carry trades are going to be much smaller then the yen would no longer act as a risk-off currency.”

While Japanese three-month money market rates are at minus 0.1 percent, equivalent US rates have fallen to minus 0.2 percent versus 2 percent a year back and euro rates are at minus 0.52 percent, down from minus 0.4 percent.

It is still early days; after all, acute dollar shortages in March saw all other currencies being brushed aside. But guessing the identity of the next haven currency is already “the hottest topic in FX markets,” said Nordea’s Steno Larsen.

The shifting FX dynamics may test the European Central Bank.

With minus 0.5 percent interest rates, a balance of payments surplus, large capital markets and recent improvements in European cohesion, the euro might well be a candidate to replace the yen.

One central bank official recalled the euro’s sudden spike to 14-month highs in March, driven possibly by carry traders who had used it for funding before turmoil erupted.

“It may be due to the fact that running up to the COVID-19 stress there had been some shifts in the preferred funding currency for carry trades and the euro emerged as the currency you want to be short,” he said.


Britain, EU tell each other to move on trade

Updated 20 October 2020

Britain, EU tell each other to move on trade

  • Both sides call on each other to protect billions of dollars of trade between the neighbors

BRUSSELS: Britain and the EU said on Monday the door was still open for a deal on their post-Brexit relationship, calling on each other to compromise to find a way to protect billions of dollars of trade between the neighbors.

With just over two months before Britain ends a status quo transition arrangement with the EU, talks on a trade deal are deadlocked, with neither wanting to move first to offer concessions.

A no-deal finale to Britain’s five-year Brexit drama would disrupt the operations of manufacturers, retailers, farmers and nearly every other sector — just as the economic hit from the coronavirus pandemic worsens.

European Commission Vice President Maros Sefcovic repeated on Monday that the EU still wanted a trade deal but not “at any cost” after British Prime Minister Boris Johnson said on Friday there was no point in continuing talks.

“It has to be a fair agreement for both sides — we are not going to sign an agreement at any cost,” Sefcovic told reporters after meeting Michael Gove, Britain’s point man on the existing divorce agreement, in London.

“The EU is ready to work until the last minute for a good agreement for both parties,” Sefcovic said.

Britain, increasingly frustrated by the EU’s refusal to start text-based talks, called on the bloc to make the first move, with its housing minister saying that Brussels only had to make “some relatively small but important changes.”

Housing Secretary Robert Jenrick called on the EU to “go that extra mile, to come closer to us on the points that remain for discussion.”

A spokesman for Johnson again ruled out prolonging any negotiation beyond the end of this year, when the transition period runs out, saying the EU “must be ready to discuss the detailed legal text of a treaty in all areas with a genuine wish to respect UK sovereignty and independence.”

EU chief negotiator Michel Barnier had been due in London for talks with British counterpart David Frost this week. Instead, they will now speak by telephone on Monday to discuss the structure of future talks, Barnier’s spokesman said.

Negotiations broke down on Thursday, when the EU demanded Britain give ground. Issues still to be resolved include fair competition rules, including state aid and fisheries. EU diplomats and officials cast Johnson’s move as a frantic bid to secure concessions before a last-minute deal was done, and European leaders have asked Barnier to continue talks.

British officials have repeatedly said any deal has to honor Britain’s new status as a sovereign country and not try to tie it to EU rules and regulations.

German Chancellor Angela Merkel said compromises on both sides would be needed. French President Emmanuel Macron said Britain needed a deal more than the 27-nation EU.

Britain is launching a campaign this week urging businesses to step up preparations for a no-deal departure. In a statement accompanying the launch, Gove says: “Make no mistake, there are changes coming in just 75 days and time is running out for businesses to act.”

More than 70 British business groups representing over 7 million workers on Sunday urged politicians to get back to the negotiating table next week and strike a deal.