Yen rules amid week’s start risk-off

Though US equities were able to stage an impressive recovery in the latter hours of US trade, the dominant force in currency markets on Monday remained risk-off flows, with traders citing China lockdown concerns as the major driver.

Amid a sharp pullback in global bond yields as traders reassessed global growth prospects amid the rising risk of a wider shutdown of the world’s second-largest economy, the rate-sensitive safe-haven yen was the best performing G10 currency.

USD/JPY dropped back to the 128.00 area, with the pair now more than 1.0% below last week’s multi-decade highs above 129.00. The safe-haven US dollar also benefited as a result of risk-off flows and was the second-best performing major G10 currency, with the Dollar Index (DXY) hitting fresh highs since March 2020 in the upper 101.00s.

The jump in the DXY, which is a trade-weighted basket of major USD currency pairs, was mainly a function of weakness in GBP/USD and EUR/USD as a result of risk aversion. The former at one point dropped under 1.2700 for the first time since September 2020 but was last trading down 0.7% in the 1.2730s, while EUR/USD was down a similar margin just above 1.0700 and also at fresh multi-month lows. Any euro relief in wake of French President Emmanuel Macron’s re-election did not last.

The worst performing of the major G10 currencies was the Aussie, with AUD/USD last trading down about 0.9% in the 0.7175 region, after having been as low as the 0.7130s earlier in the day, its lowest levels since late February.

A steep drop in energy, industrial and precious metal prices weighed heavily on the commodity export-dependent Aussie, as did concerns about Chinese lockdowns, given China’s status as Australia’s most important export destination. The commodity-sensitive NZD and CAD held up better, depreciating a respective 0.3% and 0.1% each versus the buck.

The Canadian dollar may have been assisted by a hawkish set of remarks from BoC Governor Tiff Macklem on Monday, who reiterated the need for higher interest rates to tackle inflation, suggested a 50 bps rate hike at the next meeting was likely and even floated the possibility of a 75 bps hike. Either way, USD/CAD looks set to end the day in the low 1.2700s having fallen back from the upper 1.2700s and NZD/USD recovered from a brief dip under 0.6600.