Yen Enjoys Some Relief As Oil Prices Cool Off

• Yen bounces back as growth concerns pressure crude oil and yields
• New quarter but investors still defensive - stocks, aussie, kiwi down
• Striking part is that gold cannot capitalize, hits six-week low instead

The new quarter has not changed much in global markets. Growth concerns are still the name of the game, keeping riskier assets under heavy pressure and pushing market participants towards defensive plays. Stock markets are a sea of red in every region, trade-sensitive currencies such as the Australian dollar have broken to new two-year lows, and even crude oil has joined the bandwagon as it heads for its third week of losses.

With growth overshadowing inflation as the primary risk, traders desperate for a portfolio hedge have finally received the green light to load up on bonds again, pushing the yields on those bonds lower for a second week. In turn, this has allowed the Japanese yen to get back on its feet.

The yen has been in freefall this year, losing more than 17% of its value against the US dollar thanks to widening interest rate differentials as the Bank of Japan continues to keep long-term yields pegged around 0% and because of a terms of trade shock as energy prices went ballistic. Hence, a retreat in foreign yields and oil prices is fertile ground for a recovery in the yen. A trend reversal would also require the BoJ to pivot.

Closer look at oil, stocks, and FX

In energy markets, even though OPEC+ did not surprise traders by announcing any new production, that was not enough to offset demand risks amid concerns the world economy is sleepwalking into a recession. The good news is that both crude prices and so-called crack gasoline spreads that represent refinery margins are under pressure, a combination that will hopefully translate into lower prices for consumers at the pump, calming both growth and inflation nerves.

In the equity arena, Wall Street lost around 1% yesterday and futures point to more pain today. Stocks have been unable to capitalize on the pullback in yields and oil prices, focusing instead on the risk that earnings are about to get steamrolled by a stalling economy. The big fear is that the upcoming earnings season will be mired with companies lowering their guidance for the rest of the year, hence the scramble to slash risk exposure now.

Crossing into the currency market, the US dollar continues to reign supreme, riding the wave of caution among investors. On the opposite side of the risk spectrum, the aussie and the kiwi have both broken down to reach new post-pandemic lows despite some encouraging news from China this week, pressured by global growth concerns and the softening trend in commodities instead.

Gold selloff, crucial data in focus

Gold has been under tremendous strain as well, reaching a new six week low on Friday, even with real yields moving in its favor and global risk sentiment in tatters. The culprit behind this selloff was probably India, one of the world’s top consumers of gold, which blindsided traders by announcing an increase on its import taxes to bring a ballooning trade deficit under control.

As for today, the latest inflation stats from the Eurozone could be crucial in settling the debate of how much the European Central Bank is going to raise rates this year.

The main event though will be the ISM manufacturing PMI from America. With the spotlight shifting towards growth, some of the components of this survey like new orders that are considered forward-looking indicators of economic activity will attract extra attention. Regional surveys have been gloomy and if this is echoed by the ISM print, risk appetite could remain low.