Yen Gains as Risk-Taking in Currency Market Proves Short-Lived

  • Effect of BOJ negative rate gives way to risk aversion
  • Stocks, oil, commodities weaken amid global growth concern

Risk-taking spirit in the foreign-exchange market has proved temporary.

Investors piled into the yen and dumped currencies of commodity producers such as the Canadian and Australian dollars -- a classic risk-off trade that has dominated the market in 2016. An oil rout, coupled with continued concern about the global economic growth outlook, outweighed the brief optimism central bankers from Japan and the U.S. injected into the market last week.

The yen’s haven status is re-asserting itself just days after the Bank of Japan sent it tumbling on Jan. 29 by introducing some negative interest rates. Investors are questioning the efficacy of additional monetary easing in reviving global growth and inflation rates at this point, when it’s been three years since Japan first started quantitative easing and the consumer price index is stuck near zero.

"The market was saying ‘I’m feeling better about the world’ when the world was getting worse, that was always going to be a fragile basis for risk appetite," said Daragh Maher, head of U.S. currency strategy for HSBC Holdings Plc in New York. "The currency market is behaving in a traditional risk-off kind of way, which is one of the reasons why the yen is stronger."

The yen gained 0.8 percent to 119.97 per dollar as of 5 p.m. in New York, its first back-to-back gains in more than three weeks. Its 1.9 percent drop after the BOJ announcement on Jan. 29 was its biggest in more than a year.

Stocks tumbled and crude oil futures fell below $30 a barrel in New York while the Bloomberg Commodity Index declined 1.5 percent.

The yen fell against all 16 of its major peers Jan. 29 after Japan’s central bank voted 5-4 to apply an interest rate of minus 0.1 percent to current accounts held at the central bank.

“People have sat back and digested the BOJ action on Friday and are slowly coming to the view that the policy changes are more incremental and shouldn’t lead to a sustained weakness in yen given the volatility in financial markets,” said Peter Dragicevich, a foreign-exchange strategist at Commonwealth Bank of Australia in London.

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