The yen remains the top-performing currency this month, but it has given back some its gains over this week and some of this is related to a general bounce-back in the dollar, but some is more yen-specific, according to Bilal Hafeez, Research Analyst at Nomura.

Key Quotes

“Looking at how USD/JPY has traded during different trading sessions over the course of the day, we find that the Tokyo trading session appears to be seeing the largest moves in the yen. Last week it was yen strength and this week it has been for yen weakness. This suggests that Japanese investors have been grappling with USD/JPY breaking out from its 108-114 range of the past year that occurred last week. Typical dip-buyers such as lifers and retail may have been reluctant to buy last week, but have returned this week. Extrapolating these dynamics out several weeks is difficult, especially as we come close to fiscal year-end. Nevertheless, monitoring USD/JPY’s price action during the Tokyo session could provide an important clue for its path over the very short run.”

“More generally, the challenge in trading the yen is that its correlation with risk markets, such as equities, is changing. This year the yen has sometimes behaved as a “risk-on” currency and sometimes a “risk-off” currency. This could partly be related to the broader tech cycle that is Japan-supportive, but it is also suggestive of a transition in market regime that is unfolding. The one trend we think is associated with whatever regime emerges is a weak dollar against the yen thanks to the US’s twin deficits, a “stagflationary” tilt in macro data and valuations.”

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