Yen Trades Near One-Year High as Default Risk Stokes Volatility

Yen Matters Far Less Than Most Investors Think: CLSA
  • Measure of currency price swings climbs to 2013 high
  • Odds of a Fed interest-rate increase this year decline

The yen traded near the strongest level against the dollar in more than a year as haven assets benefited from concern about the creditworthiness of banks and companies.

Japan’s currency, which acts as a refuge in times of volatility thanks to the nation’s current-account surplus, rose against most of its 16 major peers Tuesday, while its benchmark 10-year bond yield dropped to an unprecedented low below zero. The dollar fell a second day in New York before Federal Reserve Chair Janet Yellen gives her semi-annual testimony to Congress on Wednesday.

Increasing doubts about borrowers’ ability to repay their debts have boosted default protection costs, and embroiled Deutsche Bank AG in a debate on whether it can service some of its debt. That’s spurred a measure of global currency price swings to its highest June 2013, when the so-called taper tantrum greeted Fed plans to scale back quantitative easing. Traders are unwinding bets on further tightening this year, after the U.S.’s first rate increase in almost a decade in December.

“The headlines have sparked quite a risk-off move in markets and you’re in a nervous environment where something like this has the potential to trigger a lot of financial market volatility,” said Eimear Daly, a currency strategist at Standard Chartered Plc in London. “You’re seeing the usual dynamics play out, where you’ve got a stronger yen.”

The yen was little changed at 115.20 per dollar as of 8:37 a.m. in Tokyo from Tuesday, when it touched 114.21, the strongest since November 2014. The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 peers, rose 0.1 percent to 1,221.54, after slumping toward a two-month low in New York.

Risk Aversion

Volatility has soared across asset classes amid growing fears that defaults are looming as the world economy slows. JPMorgan Chase & Co.’s gauge of global currency swings reached 11.9 percent, its highest in more than two years. Measures of stock-market and bond volatility also climbed.

Systemic risk in European credit markets is rising, Bank of America Corp. analysts wrote in a note. Deutsche Bank’s stock and bonds tumbled on concern about its funds, prompting co-Chief Executive Officer John Cryan to tell employees that Germany’s largest bank is “rock solid.”

“The yen is fulfilling its safe-haven-status role,” said Neil Mellor, a currency strategist at Bank of New York Mellon Corp. in London. The “tumultuous” start to the year is fueling “questions on what the Fed is prepared to do. At the margins, people are thinking of the Fed backing off” from tightening policy, he said. “The yen is on the receiving end of this.”

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