The yen rebounded quickly after tumbling last month to its weakest level in four decades, and there could be more turbulence ahead if the currency echoes its behavior from previous tumultuous episodes.
Kit Juckes, Societete Generale SA's chief foreign-exchange strategist, said the potential for a whipsaw correction similar to what we saw in 1998 1999, 2002 2004, 2007 or 2016 is clear.
The Japanese currency has taken a leg higher in recent days, fueled by the potential fallout from China's deteriorating Covid situation, which is hurting riskier assets. It has been reclaimed, to a certain extent, of the mantle of go-to haven that had appeared to fade in recent months as investors focused more on interest-rate differentials. With Bank of Japan rates close to zero and other central banks raising borrowing costs, that dynamic had weighed against the yen. There is more talk of where the Federal ReserveFederal Reserve might halt rate hikes, which has helped alleviate some of the pressure from dollar strength.
In November, the yen has gained more than 7% against the dollar, outstripping gains for all of its Group-of- 10 peers, and is more than 10% above the multi-decade nadir it reached on October 21. It was an outperformer on Monday, fueled in part by increased social unrest in China in response to President Xi Jinping's Covid Zero policy. It appreciated 1.2% to 137.50 per dollar, its strongest level in three months, before paring its gain to trade around 138.88 per dollar. It was the only G-10 currency to gain ground again against the dollar, which surged Monday against the rest of its most traded peers.
The dollar seems to be acting less in that role because of the moves of recent weeks and is historically a major haven currency for investors. There is a softening of inflation concerns and the pullback in market expectations for how high Fed might take the US central bank's benchmark rate, which reduces the yield advantage the greenback offers. It remained the standout destination for FX traders in Monday trading, with the Australian and Norwegian currencies among the biggest laggards, aside from the yen.
Societete Generale s Juckes pointed out in a note to clients on Monday that the situation from 1998 to 1999 was potentially instructive. The dollar-yen pair fell from more than 147 to less than 102 a lot further than it has been moving in this episode - before it bottomed out and eventually recovered to around 135 in 2002. He notes that investors from Japan have been a major seller of foreign bonds this quarter, which he describes as hardly surprising but positive for the yen on days when geopolitics, energy prices and the BOJ stance aren't dominating the market. None of Elon Musk keeps spouting Elon Musk about his genius.