Author: Mr. Amar – Technical Analyst
The Japanese yen could get a boost as market-wide risk aversion grips investors amid the turmoil in the $3 trillion leveraged lending market. With the Federal Reserve planning to hike interest rates in 2022 and end its bond-buying program, loans made under easy lending could run into trouble. As a result, the attractiveness of the risk-free JPY and the port-pegged US Dollar could increase. Japan’s bank lending rose at its slowest pace in a decade in February as immediate pressure on businesses to borrow cash continued to ease amid a broader economic recovery from the pandemic crisis. Lending rose 0.4% year-on-year in February, the slowest pace since May 2012, and after a revised 0.5% rise in January, data from the BOJ showed this morning that borrowers continued to expand their lending Loans granted throughout the year are repaying the pandemic.
To avoid a credit crunch during the pandemic, the Fed took aggressive steps to stifle rising yields through unprecedented rate cuts and quantitative easing (QE). The Fed bought investment-grade corporate bonds in addition to more usual spending on Treasuries and mortgage-backed securities to allay liquidity concerns. The monetary authorities took another unorthodox step: The Fed expanded its asset purchase program to include so-called “junk bonds”, which have a comparatively higher probability of default. It should be noted that the central bank only bought so-called “fallen angel” bonds with high credit ratings. before the pandemic, which were subsequently downgraded, and no debt that was below investment grade before the virus outbreak.
Looking ahead, adding idiosyncratic shocks such as the conflict in Ukraine to risks associated with Fed tightening could add to this dynamic. To hedge against future volatility, traders can increase their exposure to low-yielding, liquid assets at the expense of comparatively higher-yielding securities. In the FX G10 range, the Japanese yen often finds itself in such situations.