JPY: AI cyber-security risks in focus boosting safe haven demand

The yen has been the best performing G10 currency overnight alongside the Swiss franc driven by more risk-off trading conditions. It has resulted in USD/JPY falling back towards the 157.00-level. Yen strength overnight has coincided with further weakness in Asian equity market. South Korea’s Kospi equity index has once again recorded one of the biggest losses falling by over 4% overnight. It continues to reflect lingering unease over AI-related companies that has put dampener on global equity market performance this month alongside higher interest rates and energy prices. MSCI’s global equity index last hit a record high back in mid-August and has since been consolidating at higher levels over the last couple of months.

At the same time, the sharp widening in yields spreads and between French government bonds and other major government bonds continued yesterday highlighting the ongoing loss of confidence in the sustainability of debt in France which is adding to investor unease in the near-term. The sell-off in French government bonds could be encouraged further at the end of this week by the upcoming sovereign credit rating review from Moody’s scheduled for tomorrow. Moody’s currently rates France at Aa3 which is on notch above S&P and Fitch. It has a negative outlook which increases the likelihood of a downgrade this week lowering its rating in line with Fitch and S&P who are scheduled to hold their own review on 27^th November.

Rising government bond yields are making the ECB’s job more difficult in setting monetary policy at a time when energy prices continue to move higher in Europe. The price of natural gas has risen by almost 30% this month extending its advance since the US-Iran conflict began to around 180%. In contrast, natural gas prices in the US are largely unchanged over the same period. The unfavourable combination of rising natural gas prices in Europe and the further deterioration of investor confidence in French government debt is encouraging a weaker euro. Higher government borrowing costs if they are sustained are triggering an unwanted tightening of financial conditions in the euro area which may curtail how much the ECB needs to raise rates in response to higher energy prices. EUR/USD has adjusted lower since the summer but has recently found support at the around the 1.1200-level.

The US dollar has lost upward momentum amidst more risk-off trading conditions over the past week undermined in part by the paring back of investor optimism towards AI-related investments, and the scaling back of Fed rate hike expectations. The US has underperformed again overnight alongside the sell-off in Asian equity markets highlighting again that it is now trading more likely a risk currency than a safe haven. There have been record foreign inflows (click here) into riskier US equities and corporate bonds in seek of higher returns over the past week. Investor sentiment towards AI may have been undermined overnight by the emergence of further cyber-security risks indentified by AI. Governments and some the world’s biggest companies are reportedly rushing to protect their systems after the discovery of critical cyber-security flaws. According to the BBC, they are present in the PHP programming language that underpins a significant number of websites which cyber-security firm Wiz estimates could affect “roughly 70% of the internet”. It has already prompted various European countries to shut down public web services as a precaution until the flaws could be fixed. OpenAI whose technology was used to find the flaws called the discovery “one of the most impactful security issues in recent memory”. They added that it “highlights how AI can uncover security flaws” but also how it can “help attackers rapidly develop offensive tools and exploits”.   

The recent intensification of fiscal and political risks in Europe has triggered a sharp turnaround in the performance of the Swiss franc. EUR/CHF hit a high of 0.9486 on 30^th September, and it has since dropped sharply back towards support from the 200-day moving average at 0.9240 as the Swiss franc has again benefitted from its role as the regional safe haven currency.          

SPECULATIVE SHORT YEN POSTIONS HAVE BEEN GRADUALLY REBUILT

Source: MUFG Research, Macrobond, Bloomberg