Yen's Fate Tied to Global Stock Markets Before Fed, BOJ Meetings

  • Yen is seen as a hedge against falling shares, oil: Mizuho
  • Policy divergence continues to lend support to the dollar: ANZ

The yen’s fortunes are more closely tied to swings in global stock markets than at any time since it was freely floated in 1973.

Japan’s currency is moving in line with the world’s equity markets -- strengthening when shares fall, and slumping when stocks rise. The 120-day correlation between the dollar-yen exchange rate and the MSCI World Index was 0.71, close to a record high reached in December, amid rising demand for relatively safe assets, such as Japan’s currency. The yen reversed early gains on Tuesday as stock markets stabilized in Europe after China led another tumble in Asian equities.

Japan’s currency “is seen as a good hedge against stocks and commodity prices,” said Neil Jones, the London-based head of hedge-fund sales at Mizuho Bank Ltd. “That’s a key factor that is driving the yen at the moment. While the BOJ may ease policy further, we don’t expect it to happen this week.”

The yen was little changed at 118.51 per dollar at 9:27 a.m. in New York. Against the euro, Japan’s currency was little changed at 128.37 after gaining as much as 0.4 percent.

The Shanghai Composite Index slumped 6.4 percent, while the MSCI Asia Pacific Index dropped 1.7 percent.

Best Performer

The yen is the best-performing major currency this year, gaining 1.5 percent against the dollar, as stocks worldwide have lost more than $6 trillion in value.

“Without exception, every single client we met had participated in the new year’s risk-aversion move,” Richard Franulovich, chief currency strategist for the northern hemisphere at Westpac Banking Corp. in New York., wrote in note about his visit to U.K. clients including hedge funds. “Going forward, views appeared to be equally split on whether the lurch lower in global markets was just a ‘risk aversion patch’ or a tipping point for ‘something really big.’”

The Federal Reserve decides monetary policy Wednesday, followed by the Bank of Japan two days later.

The BOJ will decide whether to add to its asset-purchase program as waning inflation expectations, a drop in oil prices and a reversal in the yen’s declines have put pressure on the central bank to do more. Some BOJ officials view Friday’s decision as a close call, according to people familiar with their discussions.

Risk-Aversion Move

A gauge of the dollar was little changed after climbing 1.6 percent this month even as concern the global economy is slowing threatens to keep the Fed from boosting interest rates anytime soon. The probability of a rate increase by the Fed this week has stayed low after the December liftoff, and chances of a March boost have fallen to one-in-four from even odds at the start of the year.

European Central Bank President Mario Draghi signaled last week further stimulus may be necessary in March, supporting the greenback against the euro.

Europe’s shared currency fell 0.1 percent to $1.0834 Tuesday, below its $1.0890 close on Jan. 20, the day before the ECB’s policy decision and Draghi’s comments.

“Despite the market pushing back the timing of the next Fed rate hike, the theme of policy divergence continues to lend support to the dollar,” said Khoon Goh, a senior currency strategist at Australia & New Zealand Banking Group Ltd. in Singapore. “The next move by the Fed is still expected to be a hike, while the odds of further easing by the ECB and BOJ have risen.”

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