Coronavirus Fears Turn Yen From Haven to Liability 

(Bloomberg) -- Fear of the spreading coronavirus is stripping the yen of its title as a haven asset.

The Japanese currency has fallen about 2% against the dollar this week to its weakest in 10 months, even as traditional havens gold and Treasuries pushed higher. As new cases mount, the impact of the virus on supply chains and demand is pummeling Japan’s economy, already under pressure after last year’s sales-tax hike.

Here are four charts which show the erosion of the yen’s status as a safe asset:

Yield Divergence

The dollar-yen has traditionally enjoyed a close relationship with yields on U.S. Treasuries -- the financial market’s ultimate risk-free asset -- especially during periods of market stress. However this time that’s not happening and the 60-day correlation between the two has fallen to the lowest since December 2018. The benchmark 10-year U.S. yield fell to a five-month low this week, but the dollar-yen’s move in the opposite direction suggests little haven demand for Japan’s currency.

Coronavirus Fears Turn Yen From Haven to Liability 

“The yen is being sold because the Japanese economy is already weak due to the effect of the tax hike in October,” said Toshiya Matsunami, chief analyst at Nissay Asset Management Corp. in Tokyo. “And the economy is expected to get even weaker.”

Sliding With Neighbors

Currency sell-offs weren’t limited to the yen in Asia. Peers in Singapore and South Korea also slid as new cases of coronavirus jumped and concern mounted that the epidemic will hurt their trade-dependent economies.

Coronavirus Fears Turn Yen From Haven to Liability 

Meanwhile, with Asian governments and central banks hinting at the possibility of extra stimulus to counter the virus’ impact, speculation is growing on a potential response from the Bank of Japan. Governor Haruhiko Kuroda said Friday that additional easing isn’t necessary yet, although he won’t hesitate to act if needed.

“A recession seems all but inevitable,” Francesco Pesole and Petr Krpata, strategists at ING Groep NV, wrote in a research note on Thursday. “Accordingly, markets are starting to speculate about the Bank of Japan’s actions in terms of monetary stimulus, which is contributing to an even less attractive rate environment for the yen.”

Dollar Batters Yen

The slump in the yen has been made worse by a surge in demand for the dollar as a higher-yielding haven currency. The potential for the U.S. economy to outperform and the sheer distance between America and the heart of the outbreak in China has helped the greenback push higher against both major peers and most emerging-market currencies so far this year.

Coronavirus Fears Turn Yen From Haven to Liability 

”The dollar is reclaiming its original status of a haven currency,” said Nissay’s Matsunami. “The U.S economy is the strongest among developed markets and the impact from the coronavirus is seen as limited.”

Yen Versus Gold

Perhaps the clearest indication the yen has been kicked out of the haven club, at least for now, is its relationship with gold. The yellow metal is sitting at a seven-year high on renewed concerns about the global economic impact of the coronavirus.

Coronavirus Fears Turn Yen From Haven to Liability 

Gold has surged about 8% so far in 2020, while the yen has fallen 3% against the U.S. dollar, breaking through the 112 level for the first time in almost a year on Thursday.

©2020 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.