Japanese Yen to Benefit from Looming Synchronised Global Downturn

Yen outlook is bright

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- Yen to rise as global economy starts to slow

- Currency cheap according to economic fundamentals

- Expects synchronised downturn in different continents

Amidst a global backdrop of high uncertainty and turmoil the Japanese Yen emerges as one of the few currencies strongly tipped to rise, say strategists at Société Générale.

“I may well want to continue buying the Yen because of the turmoil,” says Kit Juckes, global strategist at the French lender, who is turning increasingly bullish on safe-haven assets. “I have sympathy, which is rare for me, with all the gold enthusiasts in the world, in that kind of backdrop.”

The Yen is considered to be one of the investment world's primary 'safe haven' assets - something investors turn to when stock markets and commodities are in retreat.

According to research from Société Générale the Japanese currency is also undervalued when considered against Japan's economic fundamentals, which provides another reason to expect it to rise.

Currencies which are ‘undervalued’ are normally biased to drift higher towards their ‘fair value’ estimates over time, although they can be difficult to correctly ‘time’.

“The Yen is undervalued and will move if we get any more turmoil,” says Juckes.


USD Bearish

Juckes is bearish the U.S. Dollar as he sees the Fed starting to decelerate monetary tightening and, perhaps, turn the corner into a new easing cycle.

In his search for “something to buy” against the U.S. Dollar, his optimum play is the Yen.

Even the best-case scenario for the Dollar of one rate hike is unlikely to support it much. Interest rate markets are showing a possibility of one hike in 2019 but even that hike would probably not cause much upside for the Dollar, as it would probably go through without much fanfare, constituting a mere “sideshow” which markets will probably “look right through that,” says Juckes.

Despite impending USD weakness, it is still too early to buy emerging market currencies (EM) which are not likely to start rising until a later stage in the cycle, hence his call for going long the Yen.

“We are overestimating how much we are slowing down now but we have had such a long period without an economic cycle that we are not prepared for a ‘normal’ economic cycle,” says Juckes in an interview with Bloomberg News.

An economic slowdown, even a relatively mild one, such as experienced in 2000, could still devastate global financial markets, says the strategist.

Of course, a protracted global slowdown would benefit safe-havens such as the Yen, which investors seek comfort in when they become fearful.

It is not just the U.S. economy showing signs of slowing down, other regions are following suit: including Europe, China, and many EM countries.

“The US economy is showing signs of topping out, Europe is showing signs of not getting going, whilst China is showing absolutely clear signs of slowing,” says Juckes, “meanwhile a bunch of countries which had a monstrous cheap money party, with perhaps Turkey at the top of that list, are having a horrible hangover, so this is a pretty synchronised downturn.”

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