Mounting Fed Bets, War Uncertainty Put Spotlight on Battered Yen

(Bloomberg) -- Traders primed for more turbulence will potentially look toward the yen when foreign-exchange market action kicks off in the Asia-Pacific on Monday amid ongoing uncertainty around the Russia-Ukraine war and the path of global central bank policies.

The Japanese currency has proved less reliable as a go-to global haven during the recent crisis, becoming instead a barometer of what investors are thinking in terms of interest rates. With the Federal Reserve signaling it will be lifting borrowing costs further and faster, and the Bank of Japan remaining steadfast in keeping its stance quite easy, the yen has collapsed.

Even with the fallout from Russia’s Ukraine invasion blighting global markets and weighing on risk appetite, the yen has fallen close to 6% this year. It’s the worst performer among Group-of-10 peers, and last week hit its weakest level since 2015. And there may be worse to come still, if the bears are right. 

Instead, it’s the greenback that has attracted most haven flows with the Bloomberg Dollar Spot Index this month climbing to its highest level since mid-2020. The euro could face renewed weakness as Europe seeks to strengthen sanctions against Russia and wean itself off Russian fuel imports, even as it shied away from an import ban. 

Currency traders are among the first to get going for the week, hours before aficionados of Treasury futures and cash bond markets can start making wagers. It might therefore be the dollar-yen pair that gives a first reading on whether last week’s Fed-fueled selloff in U.S. interest-rate markets will continue.

As trading gets underway, volatility across many assets remains elevated. The ICE (NYSE:ICE) BofA MOVE Index -- a gauge of implied volatility in Treasuries -- is down from its early March peak, but notably above where it was for all of 2021. The same goes for a JPMorgan (NYSE:JPM) index of implied volatility for major developed currencies. 

In contrast, stocks have proven relatively resilient of late. Implied volatility in U.S. equities has actually subsided in the past few weeks, based on the Chicago Board Options Exchange Volatility Index.

It’s also going to be another key week for watchers of Russian bonds, with the sovereign and various companies scheduled to make payments on foreign-currency debt. The government has so far steered clear of veering into default territory, but with the political and financial situation in flux, investors will be watching keenly to see how the situation plays out. 

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