JPY is facing a double whammy of upward pressure related to both rising risk aversion and a narrowing US yield advantage over Japan. The latter influence has been significant, with 10 year US Treasury yields dropping by around 70bps since the end of last year, versus 10 year Japanese JGB yields. The net result is that the currency pair has fallen sharply over recent weeks and will remain constrained until US yields resume their ascent.
In the near term the escalation of tensions in the Ukraine will fuel increased safe haven demand for JPY potentially leading to a test of a test of technical support around USD/JPY 100.62 (11 September 13 high). However, strong demand around the 101.20-30 level suggests that it may require another leg lower for US yields to fuel a further sharp drop in USD/JPY.
Asian currencies are set to continue to show some relative resilience to events in Ukraine although a weaker bias is expected. Most currencies remain relatively insensitive to gyrations in risk appetite except KRW which registers the biggest correlation with our risk barometer.
Overall, lower US yields will help provide some support to Asian currencies and investors will continue to differentiate based on domestic factors rather than shifts in risk appetite. Additionally some relative stability in the CNY / CNH may also help to limit pressure on Asian currencies.