Japanese Yen: Structural support from regional flows – BNY
BNY’s Geoff Yu notes that Japanese Yen (JPY) strength is reshaping APAC (Asia-Pacific) FX dynamics by easing prior effective exchange rate pressures and allowing more nominal appreciation in regional currencies.
Geoff Yu from BNY explains that the Japanese Yen (JPY) strength is altering regional FX dynamics in Asia. This change is easing the prior exchange rate pressures and enabling regional currencies, such as South Korean Won (KRW) and Chinese Yuan (CNY), to appreciate more nominally. The current account support is a key factor in maintaining a structurally favorable outlook on the JPY.
However, the report warns that a resurgence in oil prices could reverse these gains and trigger more liquidation of reserve assets throughout Asia. The report highlights that JPY's role in regional FX trade-weighted baskets is often underestimated. While the U.S. is fixated on USD/JPY, JPY plays a significant role as a trading partner and competitor with regional economies.
The weakening JPY had been pushing up the effective exchange rates of these currencies, leaving little room for appreciation elsewhere. The JPY's move, coupled with the U.S. tolerance for dollar weakness, has provided an opportunity for the rest of the region to see nominal currency appreciation. As long as the current account support remains, the report suggests staying structurally optimistic on JPY, KRW, and CNY.
However, it is crucial to closely monitor energy prices, as a renewed oil shock could weaken regional FX and increase the risk of further reserve-asset liquidation.
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