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JPMorgan Sees Yen as ‘Only Cheap Recessionary Hedge’ Remaining

Susanne Barton

(Bloomberg) -- The yen stands out among currencies as the cheapest global recessionary hedge amid signs of a U.S. economic slowdown and as trade friction drags on.

That’s the view of strategists at JPMorgan Chase & Co., including Paul Meggyesi, who say the yen’s real effective exchange rate is 15% cheaper than its 20-year average. That makes it more appealing than other havens such as the dollar and the Swiss franc, they said, adding that they haven’t concluded a recession is imminent.

“This is pretty much the only cheap recessionary hedge left in global macro space,” they wrote in a report distributed Oct. 4.

The yen appreciated by 0.9% last week, the biggest weekly advance in more than a month, amid weaker-than-expected reports on both U.S. services and manufacturing, while September’s labor figures were mixed.

To be sure, the yen may face some headwinds, with Japan’s Government Pension Investment Fund considering allocating more to foreign bonds. But JPMorgan still sees scope for it to outperform “weak-growth laggards” such as the Australian and New Zealand dollars.

Domestic Factor

Traders tend to buy the yen, dollar and Swiss franc in times of economic struggles and turmoil. Yet the bank is recommending the yen over the U.S. currency because the dollar tends to weaken when growth worries are domestic, according to their analysis.

A 0.25% downgrade to U.S. growth would depress the dollar by 0.9%, although a similar slowing in global growth would lift the currency by almost the same amount, the strategists wrote.

Morgan Stanley strategists led by Hans Redeker favor the Swiss franc. They’re positioning “for a market increasingly convinced that the U.S. economic outlook is deteriorating” by buying the franc against the greenback.

The franc fell last week to a four-month low versus the dollar, leading the strategists to conclude it’s oversold.

Concern over U.S. economic growth helped push Treasury yields lower last week, which may also benefit the yen, JPMorgan strategists said. Among Group-of-10 and emerging-market currencies, it’s the most negatively correlated with Treasury yields, according to JPMorgan.

Benchmark 10-year Treasury yields declined the past three weeks and are near a one-month low.

JPMorgan will continue to own the yen against the euro, Aussie and kiwi largely through options, they said.

To contact the reporter on this story: Susanne Barton in New York at swalker33@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Mark Tannenbaum, Debarati Roy

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