The EM asset rally has been underpinned by a dovish Fed, receding fears of US recession and tentative evidence of macro stabilisation in China following a shift to pro-growth policies in Beijing. What has received less attention is the role played by recent yen appreciation, from both fundamental and risk angles.
The onset of Abenomics weakened JPY/USD by some 40% in the space of three years. The yen bottomed in June, received a boost in the wake of August’s CNY step devaluation and embarked on a relatively steep appreciation path in December 2015 as global risk aversion gathered pace. The BoJ’s foray into NIRP has fuelled sustained yen strength concurrently (and counterintuitively) with the rebound in EM FX and investor sentiment since mid-January. What does this mean for EMs?
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