Yen Extremes & Opportunities

Thinning year-end volatility is no excuse to ignore a few interesting market developments over the past 2 weeks. Whether it is the 11th weekly consecutive advance for EURUSD, the longest uninterrupted weekly gain since 2004—or this month's 5% plunge in USDJPY—the 2nd biggest monthly drop in 6 years. The former can be attributed to a combination of deepening inversion in the US yield curve, calling a Q1 pause in the Fed hikes (and a rate cut in H2) and of prolonged tightening from the ECB. The yen's moves are particularly significant despite the recent strengthening in bond yields. The same can be said about gold and silver as they advance over the past 2 weeks despite rebounding yields. Metals' resilience is also setting up to be a major theme of 2023-24.  But let's talk more about the yen. 

The above charts illustrate currencies' performance vs gold. The the bottom right chart (2022), shows USD is the only G10 currency to have gained vs gold (as of 20:30 London), up 0.4%. The yen, is the second weakest currency, down 13% vs gold. As I explained in chapter 1 of my book the secular approach to measuring currency performance is against a non-currency asset, preferably gold. 

You will note that in the 14 years between 2009 and 2022, the yen has mostly been the weakest or strongest currency of the year. Weakest in 2009, 2012, 2021 and 2nd weakest in 2022. Strongest in 2010, 2011, 2016 and 2018. In three other years (2014, 2015, 2017 and 2019) the yen was nearly the strongest or the weakest of the year. Hardly ever the yen's performance was middle of the range. 

How about the same charts for yen and others going back to 1993? No problem, just click here  

What will you notice? You will find the yen's risk-off or risk-on function well at work, performing on either opposite ways of the strength spectrum. Although we have never seen the yen at its weakest over two consecutive years, 1995-1996 and 2021-2022 were close. How? The yen was the weakest in 1995 and 2nd weakest in 1996—just like 2021 and 2022. So what happened in 1995-6? The BoJ cut rates down to 0.5% in 1996 from as high as 6.0% in 1990.

Can the yen pull off a recovery in 2023? You have 30 years' worth of charts to help you conclude that the yen can easily make the transition from weakest G10 currency in one year, to strongest the next. Will it be a retreat in yields? Will the Bank of Japan finally end yield curve control? I could also bring up gold and its relationship with the yen--not to mention equity indices.  So much to ponder, so many frameworks to consider. Enjoy the Holidays and best wishes for a busy, happy and healthy new year.