The market environment directed our focal point toward the Dollar. And now that it appears risk is coming off the table, we’re shifting our focus to the Yen.
Usually, when we talk about risk-on/risk-off behavior and the Yen, the AUD/JPY is at the center.
But let’s take it a step further to gain a broader perspective by looking at numerous Yen fx pairs.
The first chart highlights the developed currencies with the Sterling Pound, Canadian Dollar, Australian Dollar, and Norwegian Krone relative to the Japanese Yen.
What immediately stands out is the short-term weakness across the board. Notice the series of lower highs in all the above crosses. Considering the run most of these pairs had off last year's lows, this is a brand new change in character.
So, is this just a blip on the radar and we resume higher from here? Or, will we see some follow-through in the form of lower lows?
We think that’s an essential question as new relative lows in these fx pairs would support increasing risk-off behavior. That’s a development deserving of our attention given the current messy market environment.
But we never want to limit our analysis to developed currencies when there is so much insight to gain from their emerging counterparts.
The following chart displays the South African Rand, Indian Rupee, Rusian Ruble, and Mexican Peso versus the Yen.
Short-term weakness against the Yen has carried over to the Rand and Rupee, painting a similar picture to that of the developed currencies, above. However, RUB/JPY and MXN/JPY continue to hold near their recent highs.
Just like we've seen from the US Dollar recently, we want to see broad strength from the Yen, especially against emerging currencies. We believe the recent US Dollar strength is a byproduct of investors taking on a more defensive posture, and are viewing this newfound strength from the Yen in the same light.
Long story short, a higher Yen supports a shift toward a more risk-off environment and would confirm the recent action in USD.
We also want to brace ourselves for such a development as we'd imagine risk assets are likely to come under increasing pressure in an environment where JPY is continuing to gain against both developed and emerging currencies.
And if this is the case, we’re likely being rewarded for owning bonds and being in cash. This has already served us well in helping navigate these messy conditions and should continue to as there are no signs of them going away any time soon.
