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Japanese Yen Outlook Bright on IMF World Outlook, Covid-19 Risks

Japanese Yen Outlook Bright on IMF World Outlook, Covid-19 Risks

Dimitri Zabelin, Analyst


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Japanese Yen, S&P 500, IMF Outlook, Corporate Debt, Coronavirus – TALKING POINTS

  • Japanese Yen may rise on IMF global economic outlook amid coronavirus pandemic
  • Corporate debt, leveraged loan market under pressure despite the Fed’s intervention
  • OPEC agrees on unprecedented supply cut, but oil demand still faces a tough future

Japanese Yen Outlook Bullish on IMF Outlook, Coronavirus

The anti-risk Japanese Yen may rise if the IMF’s financial and economic assessment of the global economy sparks worries of a deep recession amid fragile credit conditions in the highly-leveraged corporate debt sector. The multi-trillion dollar market has come under greater scrutiny as the coronavirus has brought the global economy to a grinding halt and threatened borrowers with high debt-servicing costs.

Coronavirus Infections

Source: Johns Hopkins CSSE

Moody’s Investors Service recently cut the outlook for six trillion dollars’ worth of corporate debt from stable to negative as the specter of a recession looms over the horizon. Having said that, the highly-leveraged corporate debt market has seen some relief recently. In an unprecedented move, the Fed recently announced it would backstop around $2.3 trillion of loans to distressed corporations and signaled it would do more if necessary.

While the measure did see US junk bonds rally the most in two decades, CDS spreads on corporate debt are still alarmingly high. Furthermore, the fundamental forces that pushed these companies to the precipice of default – i.e. the coronavirus – are still present. If global growth continues to be pressured, it is unclear whether the Fed with all of its firepower will be able to stabilize the corporate debt market over a longer time horizon.

Japanese Yen, Leveraged Loan Price Index

Source: Bloomberg

Consequently, if the IMF’s bi-annual Global Financial Stability Report (GFSR) and World Economic Outlook (WEO) reports emphasizes these risks, it could boost the anti-risk Japanese Yen. With shelter-in-place orders curbing demand and pushing unemployment higher, the IMF’s assessment for the months ahead will likely carry gloomy undertones like their prior reports. Only now, the circumstances are far more dire.

OPEC Meetings: What Happened, Why Does It Matter For Crude Oil?

On Sunday, leaders of the Organization of Petroleum Exporting Countries (OPEC) and allies – known as OPEC+ – agreed to reduce production by 9.7 million bpd, the largest supply cut in history. Oil-linked currencies like the Canadian Dollar and Norwegian Krone were caught in the political cross-fire of internal deliberations, mostly revolving around Russia, Saudi Arabia and Mexico.

USD/CAD, USD/NOK, USD/RUB, Brent – Daily Chart

Crude oil chart created using TradingView

The latter was responsible for extending the talks but finally agreed to cut production by 100,000 bpd, though it should be noted this was four times less than what been asked of them. The agreement between all parties also ended the price war between Riyadh and Moscow that began at the OPEC meeting in Vienna on March 6. The political fallout caused crude oil to experience its single-largest one day drop in history.

The 9.7 million bpd cut will begin on May 1 and will extend through the end of June – around the same time that governments may start to lift shelter-in-place orders. While this may help buoy crude oil in the short run, the underlying circumstances that crushed demand are still pressuring the cycle-sensitive commodity. The coronavirus has disrupted economic activity and hollowed out demand for the key energy input.

Until that issue is resolved, crude oil will likely continue to experience downward pressure from eroding confidence in the fundamental outlook despite the politically-induced supply disruption. Investors witnessed a similar dynamic play out in 2019. Crude oil continued to gradually decline from its 2018 peak amid deteriorating fundamentals despite high tensions with Iran that threatened the disrupt the distribution of oil.

Currencies Eye Sovereign Credit Ratings as Growth Outlook Darkens

Currencies tied to states undergoing a credit rating to their sovereign debt may experience higher-than-usual volatility. The British Pound and Euro may face some selling pressure if the outlook from Moody’s and DBRS respectively revises down the UK’s and France’s outlook. Having said that, G-20 officials announced over the weekend that sovereign debt payments for poor nations may be frozen until as late as 2021.

Consequently, this may dampen volatility from credit rating-induced changes that speak to an underlying fundamental uncertainty. However, the financial feasibility of delaying or freezing sovereign payments and what that could mean for additional debt issuance for stimulus is unknown. The uncertainty of the circumstances by itself could be potent enough to put investors on the defensive and push JPY in the spotlight.

Here are other noteworthy political risks in the week ahead:

  • French President Emmanuel Macron’s speech on Easter which may hint at an extended lockdown
  • EU health ministers hold a virtual conference
  • South Korean Parliamentary Election
  • EU trade ministers hold a virtual conference
  • OPEC monthly oil market report

--- Written by Dimitri Zabelin, Currency Analyst for

To contact Dimitri, use the comments section below or @ZabelinDimitri Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.