The status of the yen as a safe haven during times of global tension is facing increasing skepticism, which could intensify the selling that sent the yen to an eight-month low this week.
For decades, whenever markets have been hit by shocks ranging from financial crises to geopolitical turmoil, investors have turned to the Japanese yen. The logic is simple: Japan’s huge current account surplus, stable political system and deep domestic investor base make it a reliable safe haven when risky assets plummet.
But now, this intuition is under pressure. The performance of the yen as a hedging tool has become increasingly unstable. Coupled with investors’ shift away from major currencies in trading and their preference for gold instead, these factors have weakened this intuition about the yen. This week, the hawkish conservative Sanae Takaichi unexpectedly won the leadership election of Japan’s ruling party, and the yen broke through the key level of 150 against the US dollar.
Keiko Kondo, head of multi-asset investments for Asia at Schroders Investment Management, said: “Historically, we have sometimes gone long on the yen for hedging purposes because it has been quite reliable when risk has dropped significantly in the previous cycle.” “Currently, we don’t have sufficient reasons to do this kind of hedging,” she added, noting that the cost is high and the reliability is low.
The transformation of the yen’s status is reflected in a significant shift in its correlation. The recent negative correlation between the USD/JPY and the S&P 500 index aligns with the period of political uncertainty in Japan. This implies that the yen strengthens during periods of rising global risk appetite and weakens during sell-offs, which is contrary to the expected performance of a hedge.
Some of the data reflect Japan’s unique financial landscape. Even as other major central banks around the world have turned to cutting interest rates, the Bank of Japan remains the only major central bank that leans towards tightening. However, its pace of monetary policy normalization has been slow, while the pro-stimulus opposition camp in the high court tends to favor a loose policy.
Jian Peng, head of Asian investment strategy at Citigroup’s wealth management division, said: “I no longer view the yen as a barometer of risk to a great extent.” He added that the yen “more reflects market expectations regarding the extent of the Bank of Japan’s interest rate hikes and whether Japan’s reflation and economic growth can be sustained.”
The 30-day correlation between the USD/JPY and the VIX has turned positive, indicating that the currency is no longer tracking volatility in the expected direction.
The options market also reflects this. The significant decline in the implied volatility of the USD/JPY pair indicates that the urgency for hedging is generally insufficient, while the risk reversal (a measure of the demand for upside protection versus downside protection for the currency pair) is on the rise. This suggests that demand is shifting towards betting on the weakening of the Japanese yen.
Technical analysis:
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Gold: The price has broken through the 4000 mark. Although there has been a short-term pullback, the overall trend remains unchanged. Continue to maintain a bullish stance for the day and pay close attention to the momentum breakthrough signal after the resistance at 4035/4045. At the same time, watch for the low-buy opportunity at the 3980 level. For detailed positions, please consult the plugin.
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Before the holiday, our plugin clearly reminded of the green low-buy strategy at 24,419 on the Nasdaq. After the holiday, it has already made a profit of over 1,000 basis points. Given that the price maintains an upward trend, the operation should continue to adhere to the strategy of choosing the right time to buy low. Pay attention to the low-sweep liquidity at the 25,000 level intraday, and then look for the signal of a rebound in the bulls. For detailed positions, please consult the plugin.
(NASDAQ 15-minute chart)
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Crude oil: The easing of the situation in Gaza and the expected subsequent increase in production by OPEC+ have led to a pullback towards the $60 mark over the past few days. However, as the news began to be digested, the price gradually stabilized. For today, we suggest paying attention to the low-buying opportunity around $61/$61.50. At the same time, also keep an eye out for the signal of a momentum break. If the price recovers above the $62.50 level, it may be worth considering a short-term long position. For detailed positions, please consult the plugin.
(Crude Oil 15-Minute Chart)
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Key economic data and events to focus on today:
14:00 Germany August seasonally adjusted trade balance (billion euros)
At 20:30, US Federal Reserve Chair Powell will deliver the opening remarks at a community bank conference hosted by the Federal Reserve Board.
At 20:35, US Federal Reserve Governor Bowman will deliver a speech.
