High-Vol Regime Should Support JPYKRW

• The dovish BoJ comments in March have led to a significant JPY depreciation in recent weeks against major crosses, particularly the dollar.
• It was interesting to observe that JPY, which has historically been considered as a traditional ‘safe haven’, has performed extremely poorly in the past two months despite the surge in price volatility, down nearly 10% against the greenback.
• However, a persistent high-volatility regime could eventually bring interest back on the Japanese yen, particularly against some EM currencies that have historically been sensitive to sharp equity drawdowns.
• The chart below shows the strong co-movement between JPYKRW (risk off pair) and price volatility (VIX) in the past 30 years.
• As South Korea has historically offered higher yields than Japan, investors have been chasing Korean assets in expansionary periods but then swap back their Korean assets to Japanese asset (especially JPY) in periods of crisis and market selloffs.
• JPYKRW found resistance at 10.11 on Thursday before consolidating lower in on Friday amid strong rebound in global equities.
• However, surging stagflation risks combined with the sharp tightening in financial conditions should maintain price volatility elevated in the medium term, which could support JPYKRW.

Source: Bloomberg/MNI.