The Japanese yen rallied on the Bank of Japan (BoJ) governor’s “exit” talk. Nonetheless, global recession risk is more pertinent to JPY strength, in the view of economists at HSBC.

Risk appetite to be a near-term dominant FX driver

“On 26 May, the JPY strengthened further, with USD/JPY declining to intra-day lows, and this was buoyed by the mere mention of ‘exit’ by the BoJ Governor, Haruhiko Kuroda.”

“We expect risk appetite (rather than rates) to be the more dominant driver over the next few weeks, and given the pressures holding back risk appetite looks set to remain in play for now (such as concerns over slowing global growth and geopolitical uncertainties), it points to general weakness in ‘risk-on ’currencies.”

“With markets concerned about US growth, the JPY should be the new ‘go to’ safe-haven currency, a development likely to be welcomed by the Japanese government.”