TTN Analysis: Markets starting to question the safe qualities of the Yen and Franc

- Yesterday’s WSJ “Heard on the Street” column noted that the yen could be losing its status as a haven currency. This report comes as this week’s drop in equities has failed to significantly impact the yen. As the S&P 500 closed Monday’s session down more than 3% vs. Friday’s close, the yen declined by more than 1% against the dollar during the same time period. This could show that the yen’s correlation with stock prices may be breaking down. The underperformance of the yen can also be seen, by comparing AUD/JPY to AUD/USD. During the current week, AUD/JPY has gained more than 5% and has moved to a 7-week high, while AUD/USD is only up less than 1%.

- The underperformance of the yen comes amid concerns about the Japanese economy. Japan’s recently released Q4 preliminary GDP figures showed that growth on an annualized basis contracted by 12.7% versus the prior contraction of 2.3%. In comparison, the US Q4 GDP contracted by only 3.8%, while the UK’s economy contracted by 1.9%. In addition to recent Japanese GDP figures, Japan trade situation has deteriorated. Recent Jan trade balance figures, showed that Japan’s exports declined by 45.7% y/y, which was a record decline.

- Besides Japan’s economy weighing on the yen, the country’s political situation has also raised concerns. Following an incident at the recent G7 meeting, Japan’s former Finance Minister Nakagawa tendered his resignation on 2/17. On this date, once again equities in the US declined by more than 4%, but the yen lost close to 1% against the dollar. On Feb 19, former Japanese Ministry of Finance official Sakakibara (“Mr Yen”) said that Japan’s economy and the conduct of Nakagawa had hurt the yen, while at the same time noting that USD/JPY could rise to ¥100. In early Jan, Sakakibara said that USD/JPY could fall under ¥80 in H1 2009. Besides the resignation of Japan’s former Finance Min Nakagawa, the plummeting approval ratings for PM Aso have raised concerns. A recent NTV poll taken in Feb, put Aso’s support rating at 9.7%, which was the lowest level for any Japanese PM since 2001. Aso declining popularity in Japan has led to speculation that he may seek to reshuffle his cabinet or even resign. According to a recent poll taken by the Asahi newspaper, more than 70% of respondents want Aso to quit. Japan’s political turmoil is coming at a time when lawmakers are attempting to come together to devise ways to stimulate Japan’s economy and equities markets.

- In addition to domestic factors, the yen’s safe haven status is waning as the interest rate differential between Japan and the US is currently marginal. This is notable because during prior bouts of risk aversion in markets, the yen would gain against the dollar and other currencies, as traders reversed carry trades or bullish bets on higher yielding currencies. A recent, WSJ article noted that some currency experts believe that most carry trades have been unwound at this stage, which could be reducing the need to buy yen, during turbulent times in markets.

- Like the yen, the Swiss franc’s safe haven status has also been recently questioned. One factor that has weighed on the Franc’s is the US government’s probe into whether Swiss banks helped US individuals evade taxes, which has threatened Switzerland’s bank secrecy laws. According to a recent note from an analyst at Commerzbank, the franc has lost its safe haven status do to concerns about the country’s financial institutions. UBS countered by saying that the franc is still a safe haven currency and said it would take a sustained recovery in investor sentiment to weaken the franc against the euro.

- With the haven qualities of the yen and franc both being challenged, it leaves the question of whether the dollar will receive even more safe haven flows during times of market instability at the expense of CHF and JPY. Or possibly, investors might just seek to buy gold. The assets of the world’s largest gold ETF, SPDR Gold Trust, are currently sitting at record levels due to strong demand by investors.

- Nothing in mind on next policy step as of yet
- Unsure if can replace overnight call rate with any other target
- Plans to monitor effectiveness of previous policy steps
- To consider effective ways to impact term-fund rate

BoJ Gov Shirakawa: Japan’s economic outlook is ‘very uncertain’

- Corporate funding hosts are somewhat lower than in Dec.
- Smaller firms see tightened lending by banks, face weak financial conditions

- Sees Japanese economy “Worsening Rapidly,” and in a “Severe Situation”
- Downgrades its views on consumption, exports and the global economy

- lowering long overnight rates does not always translate to lower long term rates
- CPI to fall in spring as demand weakens
- corporate bond purchases could improve market functionality
- Q4 GDP could be revised upwards
- BoJ to continue to take extraordinary steps as needed
- 0% rates were not discussed