Looking across asset classes, it is fair to say that just like equities and credit, FX markets have traded with a ‘glass half full’ mindset. After a brief spike through March, FX traded volatility has sunk back to the lower end of the range seen over the last three years. As always, lower volatility encourages the search for yield and, across both developed and emerging currencies, high yielders are in demand.
In the developed space, it has seen both the Norwegian krone and the Australian dollar outperform. Not only do both these currencies offer implied yields in excess of 4%, but also net positive exposure to the energy story. Both countries have seen their terms of trade improve markedly over the last eight weeks. And both central banks have already hiked during the crisis and are holding open the door for more tightening. We expect continued strength in these currencies.
At the other end of the spectrum are the low yielders and those threatened with a larger energy import bill. The yen stands out here – especially with the Bank of Japan dragging its feet with rate hikes and leaving real interest rates in deeply negative territory. So far, it looks like the Bank of Japan has sold around $70bn to defend the critical 160 level in USD/JPY. Intervention looks less fundamentally justified than in 2024 (when the Fed was preparing to ease). We suspect this is just the start of a long campaign of the BoJ battling the market at 160.
