by Albert Loo, Global Co-Head of Interest Rate & Forex Derivatives for Corporates and Didier Latouche, Global Head of Forex for Corporates, Societe Generale
In an economic context that is globally dominated by considerable uncertainty, financial markets in general, and foreign exchange markets in particular, have adopted a wait-and-see policy. This paralytic phase, marked by an absence of strong trends, has one notable exception: the yen. The Japanese currency is undergoing an impressive rise, accentuating the increase in value that started in 2007 - USD/JPY and EUR/JPY parities have thereby fallen to fifteen- and nine-year lows respectively.
This trend is such that there are obvious similarities with a potential ‘bubble’ in which the price of an asset durably disengages from its fundamental factors via a violent, uncorrected movement. Indeed, the continued rise of the yen is obviously occurring in a highly negative economic context: persistent deflation, zero interest rates, very poor public finances and chronic political instability. The Japanese currency’s current resilience can only be explained by a high degree of aversion to risk and extremely low long rates in the US.