Market News

(Bloomberg) -- The yen’s two-month freefall looks to be over as slowing growth in China and expected damage to the US economy from Federal Reserve rate hikes bolster its haven credentials, strategists say.

The currency is set to recover as this month’s swoon in US stocks sends Treasury yields lower, removing a major driver of dollar strength, according to Australia & New Zealand Banking Group Ltd. The drop in US yields may see the yen rebound to 125 per dollar, says Shinkin Asset Management Co. Barclays Securities Japan Ltd. says the one-way decline in the yen is over.

“Market sentiment has changed since the Dow broke a key chart point that held it in an elevated range despite aggressive Fed rate hikes,” said Hiroyuki Machida, director of Japan foreign-exchange and commodities sales at ANZ in Tokyo. “An adjustment in risk assets has finally taken place and that is fueling yen buying as the market shifts to a risk-off trend.”

The yen’s return to favor looks to be already getting underway. The currency advanced to as strong as 128.41 per dollar Thursday, extending gains to more than 2% from a two-decade low of 131.35 set a week ago. Part of the reason has been a decline in Treasury yields, with the US 10-year note falling to 2.84% from this month’s high of 3.20%.

The yen’s outlook is improving due to global-growth negatives including the “Ukraine situation, the impact on the US economy from aggressive rate hikes and Chinese lockdowns,” said Jun Kato, chief market analyst at Shinkin Asset Management in Tokyo. “Shrinking liquidity as central banks turn hawkish may also spur flight-to-quality buying to help cap US yields.”

There seems little reason to push Treasury 10-year yields back above 3% as that level reflects markets fully pricing in the Fed’s policy outlook, Kato said. The yen is likely to trade in a range of 128 to 133 per dollar for now before markets decide the next direction, which may include it appreciating to test 125, he said.

The yen has plenty of room to recover. The currency is still down more than 10% versus the dollar this year as the Bank of Japan has stuck to a dovish tone even as other major central banks have tightened policy. The yen has also suffered as rising commodity prices have damaged the outlook for Japan’s resource-importing economy.

Read More: Goldman Says Yen Shows Significant Value as a Recession Hedge

The prospect of the yen weakening to 135 per dollar that was seen as probable just a week ago now seems much more unlikely, said Shinichiro Kadota, a foreign-exchange strategist at Barclays Securities Japan in Tokyo.

“The one-way upward path in dollar-yen looks to be turning around as markets may no longer be aggressively pricing in successive rate hikes due to the concerns about the impact of China’s growth slowdown,” he said.