Traditionally, the JPY has worked outside of the risk on currencies. It has acted with fairly low correlation to risk assets, and even traded with negative correlation with HY, EM and other high beta asset classes over long time frames. Many investors therefore use it as a safe haven. This time, however, JPY seems to have lost its touch. USD has strengthened in the last few months leaving JPY behind. Why is this?
There are several reason we can highlight here but all have been hurting our heads lately. Firstly, a change in leadership is not usually currency-positive, at least initially.
Secondly, the CNY has barely moved on the back of all of the Evergrande volatility. The PBoC is keen to formulate the narrative that CNY could be the next Asian reserve currency, meaning that right now CNY JPY is a buy. The Chinese economy is also increasingly important to Japan, while high import prices and a weaker Chinese economy play a role too. Japanese exports to China now are higher than they were to the US 20 years ago, so a weak Chinese economy weighs on Japan and JPY.
Thirdly is the simple narrative that the USD is a buy right now with the prospect of higher US rates. JPY has been cheapening as Treasuries rise, and interest rate differentials are being squeezed as Japan’s central bank remains accommodative. The low yielding currencies will all struggle versus USD now, while others (like CHF) have caught up on the rate differentials making JPY not so much of a standout anymore.
So we have a weird combination of a high volatility environment with much uncertainty, but a narrative of stagflation/stronger USD which is JPY-negative. The safe haven is gone at least for now.
7. It’s been a scary couple of years… but things could get even scarier
And finally… it’s certainly been a scary couple of years – but things could get even scarier. With the UN Climate Change Conference approaching, important progress is being made by governments on trying to halt the planet’s warming. With ever-growing demand for ESG and sustainable investing, investors are increasingly trying to play their part too.
This is a seismic shift versus five or ten years ago. ESG is very much now front and centre. The scary part of this transition from any bond investor’s perspective is the risk of stranded assets down the line. If you lend to an oil extractor now for 30 years, will you actually get your money back? On the other hand, remaining invested allows a seat at the table to engage with companies and encourage a responsible outcome. It’s time to think about this now.
Investments aside, even scarier is the fact that, at a time when the world desperately needs global emissions to be cut, they are actually rising. Have we even reached peak emissions? This will be a crucial decade – let’s hope progress is made at the UN Conference in Glasgow next month.
