If the economy slips into a mild – but still traumatic – recession, the Yen will benefit, and so will the Euro, but the biggest winners may be the NZD and the AUD, according to Kit Juckes, Chief Global FX Strategist at Société Générale. 

USD/JPY is still following yields, EUR/USD has more complicated drivers but should rise

“We may need clear evidence that the crisis won’t be contagious, and that it won’t alter the path of ECB rates, before the Euro makes new cycle highs, but USD/JPY continues to track yield differentials and history tells us that USD/JPY hit 160 in April 1990, fell to 120 as rates fell to 3%, and kept on going, falling below 80 1995.”

“Continued FX volatility is assured as the markets fret about contagion, and if that were to emerge, the Dollar can turn higher very quickly. But if this event validates the signals from the yield curve and leads to a 1990s-style mild recession, the Dollar will fall further. The Yen will benefit, and so will the Euro, but the biggest G10FX winners in the short run may be the NZD and even the AUD.”