Just Like Yen Does, Similar Currencies Not As Focused on a Path

Apart from the Yen, on reopening optimism, sterling was the comparatively steadier one, as the second strongest currency. On the other hand, the Yen’s selloff was considerably more visible, whilst the Australian dollar was pulled down by selling against the Yen. The third-worst performer was the Swiss Franc.

Generally, financial markets were mixed in the last full trading week of May. The New Zealand dollar originally soared following the RBNZ’s hawkish comments. However, despite finishing as the strongest, it was unable to gain much ground from there. After robust inflation data, it appeared that the dollar was about to turn around, but it also battled to close the firm.

Across other markets, US stocks and rates stayed within predetermined ranges. The DAX attempted to continue its record run but was unable to do so due to a lack of impetus. The Nikkei mounted a strong comeback, but it was unable to reclaim the 30k handle. Despite continuing its current advance, gold has yet to firmly break over the 1900 handle. WTI crude oil was unable to securely break over the 67.83 resistance level.

Yen Downturn Is Expected To Persist

This week, the Yen is by far the worst-performing currency in the G10 group. While negative news in Japan, which lowers inflation expectations, could support the yen, the Bank of Japan’s monetary policy over a long period, combined with expectations of extended fiscal support and an overall high-risk appetite, all together keep the yen weak.

Japan may be heading for another technical recession as the government intends to declare an extension of the current state of emergency until June 20 – just 5 weeks before the start of the Olympic Games.

According to the Nikkei newspaper, this is likely to mean that the BOJ will respond to the extension of its pandemic relief program beyond the current deadline in September. Thus, the global theme of reflation that is taking place in the US, Europe, and the UK is likely to exclude Japan, which is likely to lag as it is cautious to ensure the continuation of the Olympics.

Given our view of broader US dollar weakness, there is much more room for the yen to depreciate compared to non-dollar currencies. Although cross-border portfolio flows have yet to show clear outflows since the beginning of the fiscal year, the speculative market quickly prepared for the yen’s weakening to end.