Should risk aversion prevail for now, the Japanese yen (JPY) is likely to outperform ‘risk on’ currencies – but not the US dollar (USD), in the view of economists at HSBC. 

JPY to strengthen against the USD over the medium-term

“In the coming weeks, if US activity data weakens but the Federal Reserve (Fed) retains its ‘more work to be done’ narrative, then it will likely contribute to risk aversion. As a result, both the USD and JPY are likely to capitalize as ‘safe havens’, perhaps with modest USD outperformance.” 

“Given our expectation for a risk-averse environment (amid market concerns over global slowdown) to prevail for now, we expect the JPY to outperform ‘risk on’ currencies (like the AUD and NZD), but to move largely sideways against the USD as they share similar ‘safe-haven’ profile.”

“Looking beyond the near-term, we believe the JPY is under-priced for the risk of a global economic downturn and for the possibility that the BoJ may have to eventually tweak its monetary policy somehow. We still maintain our medium-term JPY bullish view.”