Mounting Fed Bets, War Uncertainty Put Battered Yen in Focus
Mounting Fed Bets, War Uncertainty Put Spotlight on Battered Yen
(Bloomberg) -- The yen will be in focus this week as traders brace for turbulence amid ongoing uncertainty around the Russia-Ukraine war and the path of global central bank policies.
The Japanese currency has proven less reliable as a go-to global haven during the recent crisis, becoming instead a barometer of what investors are thinking in terms of interest rates.
With the Federal Reserve signaling it will be lifting borrowing costs further and faster, and the Bank of Japan remaining steadfast in keeping its stance quite easy, the yen has collapsed.
Traders will get more insight into the Fed’s thinking this week, with officials including Philadelphia Fed President Patrick Harker and Atlanta Fed president Raphael Bostic due to speak.
Even with the fallout from Russia’s Ukraine invasion blighting global markets and weighing on risk appetite, the yen has fallen close to 6% this year. It’s the worst performer among Group-of-10 peers, and last week hit its weakest level since 2015. And there may be worse to come still, if the bears are right.
Japan’s currency was little changed at 121.98 per dollar as of 6:32 a.m. in Sydney, following three consecutive weeks of decline. That comes after officials said in-person talks between Ukrainian and Russian negotiating teams will resume this week.
As trading gets underway, volatility across many assets remains elevated. The ICE BofA MOVE Index -- a gauge of implied volatility in Treasuries -- is down from its early March peak, but notably above where it was for all of 2021. The same goes for a JPMorgan index of implied volatility for major developed currencies.
In contrast, stocks have proven relatively resilient of late. Implied volatility in U.S. equities has actually subsided in the past few weeks, based on the Chicago Board Options Exchange Volatility Index.
It’s also going to be another key week for watchers of Russian bonds, with the sovereign and various companies scheduled to make payments on foreign-currency debt. The government has so far steered clear of veering into default territory, but with the political and financial situation in flux, investors will be watching keenly to see how the situation plays out.
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