What defines a safe haven currency? This is a questions that has been sidestepped many times by financial participants in the past. Back when conditions were optimal, there was little doubt that US Treasuries, gold and the Japanese yen were key harbors for rough financial weather. However, with an economic recession evolving into a depression and a financial crisis testing the limits of government reserves, anything and everything is being reevaluated. And, for a fundamentally-unstable and crisis-prone financial center like Japan, there may be a good reason for cutting its currency from the list.
Japanese Yen’s Safe Haven Roll Reviewed As Sentiment Fails
Fundamental Outlook for Japanese Yen: Bearish
- Citi, AIG and Lloyd’s testing the definition of nationalization and the limits of sentiment
- Chinese Premier fails to deliver expansion to stimulus plan in annual testimony sending risk appetite tumbling
- Fear is growing as government bailout and spending efforts fall short of reviving consumer and investor confidence
What defines a safe haven currency? This is a questions that has been sidestepped many times by financial participants in the past. Back when conditions were optimal, there was little doubt that US Treasuries, gold and the Japanese yen were key harbors for rough financial weather. However, with an economic recession evolving into a depression and a financial crisis testing the limits of government reserves, anything and everything is being reevaluated. And, for a fundamentally-unstable and crisis-prone financial center like Japan, there may be a good reason for cutting its currency from the list.
Looking ahead to next week, there are few, global scheduled releases that promises to redefine general risk trends. This may actually prove a stroke of good luck for the yen as traders will be able to reconsider its sharp plunge over the previous two weeks and come up with a reasonable argument to label it a safe haven. To this point however, there are few lines of reasoning to support capital flowing into Japan seeking shelter. Through the first leg of the financial crisis, the yen was rising as traders deleveraged direct or indirect carry trades through a need for cash, natural repatriation and frequently forced liquidations. Even though this was such a prevalent strategy during the height of the market’s risk appetite, it naturally has limits to which the capital will be fully exercised. No doubt, there is still a considerable amount of capital behind the carry trade, but most of it will be through pension funds and other bulk investors that weather long-term trends. Aside from carry, there was also weak support through Japan being the second largest economy in the world with benchmark rates that had extremely low volatility. Now, however, it is more than evident that primary cash targets are going to experience low volatility across the global as the world’s central banks near zero. More importantly though, a semblance of safety is hard to hold when an economy is suffering as stark a recession as the one Japan has been pitched into. With BoJ economists forecasting a worse slump than the one recorded through the 4Q of 2008, memories of the bank failures and crisis of the 1980s and 1990s are called to mind.
When it comes down to it though, the severity of a panic can send traders back to the yen regardless of the fundamental debate. For this reason, we should keep an eye on developments in the Eastern European crisis. A failure in any one of these economies can send ripples through the global financial space similar to the Russian bond default back in 1998. Also, the trend towards nationalization of major financial firms indicates lingering problems that could eventually overwhelm a government and/or destabilize fragile confidence (it’s hard to feel safe when policy officials have to constantly disarm bombs).
Considering the Japanese economy is already expected to suffer a debilitating recession, the market will also look for confirmation from the economic calendar. Among the notables, bank lending and bankruptcy numbers will be particularly important considering the plight of policy makers. The final reading on 4Q growth will also offer adjustments to sector readings; but the leading economic indicators index for January and consumer confidence figures for February will take the trend into the current year. - JK
