Yen regains safe-haven status

Wall Street has shifted its preference towards the yen as a go-to asset during turbulent times, as recent banking crises in the US and Switzerland have diminished the standing of the dollar and franc in foreign-exchange havens. Should traders target JPY right now?

JPY is the #1 performing major currency

There’s a change of fortune for the Japanese currency, which only recently required policymakers' support to bounce back from a 30-year low. Currently, the yen is the world's best-performing major currency, and industry giants such as DWS Group, JPMorgan Chase & Co., and Morgan Stanley consider it the next major trade.

This trend represents a significant shift from last year when the yen was extremely weak. The resurgence demonstrates how sentiment can quickly change, especially as the global rate-hiking cycle nears its end. As Wall Street seeks to hedge against future shocks to the world economy, the yen's strength has caught hedge funds by surprise.

Hedge funds have been caught off guard by their bearish bets on the yen, as traditional safe-haven assets regain popularity. Typically, a drop in bank stocks would cause the dollar to rise, but instead, investors are betting on the Federal Reserve abandoning its strategy of prolonged higher interest rates, which had previously made shorting the yen a profitable move.

Despite the recent turmoil leading to the takeover of Credit Suisse Group AG, policymakers in Europe and Japan are still expected to pursue tightening policies that could benefit their currencies over the greenback.

According to experts, regional US banks will be more affected by the banking sector stress, while the euro and yen are likely to be the major beneficiaries of the diminishing US exceptionalism trend.

Recession fears prompt traders to defensive strategies

As recession fears loom, investment firms like Allianz Global Investors and State Street Global Advisors are turning to defensive trades such as the yen. Deutsche Bank's DWS Group is betting on the yen to rise to 125 per dollar within the next year, while Morgan Stanley is targeting a 9% gain to 120 per dollar as investors await the extent of the economic fallout.

JPMorgan and Citigroup strategists also recommend yen options bets against the US, Canadian, and New Zealand dollars, and even Swiss franc and Swedish krona. Although the yen slipped to around 132 per dollar on Wednesday, it is still up more than 3% this month and traders with a three-month horizon have increased their bullish yen bets to the highest since 2020, according to risk reversals.

According to UBS, the yen is overly expensive to use as a portfolio hedge due to interest-rate differentials. Even so, analysts still expect the yen to rally to 120 per dollar by year-end, but advise playing it tactically.

The yen's safe-haven status may dominate short-term movements, but any indication that the Federal Reserve will keep hiking rates could support the dollar and potentially reverse the yen's gains. 

Additionally, economists warn that domestic Japanese funds not hedging overseas bond investments could lead to yen selling, driving the dollar-yen pair higher. The yen is expected to benefit from recent financial instability in the US and Europe, making it a relative "safe haven" currency.

The bottom line

As inflation returns in Japan, traders are betting on yen appreciation. This positive sentiment for JPY was followed by the news that Japan has begun to purchase Russian crude oil above the $60-a-barrel cap. Japan’s collaboration, no doubt the first of many to break with Western allies,  was authorized by the United States, suggesting Americans will not target Japan with financial weapons. Another reason to be optimistic about Japan’s economy.

Analysts anticipate the Bank of Japan to eventually normalize policy after keeping rates close to zero for so long. The BOJ's policy was one of the reasons behind the yen losing its haven status last year, which led to a more than 24% decline against the greenback at one point.

The renewed interest in the yen is expected to lead to greater currency swings, regardless of its direction. As the Fed approaches the end of its rate hiking cycle, the dollar-yen market is likely to experience increased volatility. 

While volatility can generate attractive price actions for traders. Exness offers Price Volatility Protection for all traders, which has been proven to reduce stop-outs by 30%, but Stop Loss and Take profit are still highly recommended if you plan to trade JPY pairs in the coming weeks and months.

This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.

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Author:

Paul Reid

Paul Reid is a financial journalist dedicated to uncovering hidden fundamental connections that can give traders an advantage. Focusing primarily on the stock market, Paul's instincts for identifying major company shifts is well established from following the financial markets for over a decade.