Synopsis:

Nomura assesses potential FX market behavior if US equities undergo a deeper correction, drawing on prior bear market episodes like the Dotcom crash, GFC, Covid-19, and the 2022 inflation-driven sell-off. Historically, high-beta currencies such as KRW, IDR, NZD, and AUD have seen the steepest declines, while RMB and CHF have shown resilience. However, JPY and EUR may behave differently this time, with JPY likely to outperform due to Japan's improving macro backdrop and BOJ policy normalization, and EUR buffered by rising fiscal support and reduced ECB cut expectations.

Key Points:

1️⃣ High-Beta Currencies Most Vulnerable in Equity Bear Markets 📉

• Historically, KRW, IDR, NZD, and AUD depreciate sharply during major S&P 500 sell-offs.
• On average:
  • KRW -26.5%
  • IDR -20.5%
  • NZD -16.3%
  • AUD -16.2%

2️⃣ JPY Performance Depends on Macro Context, This Time Favors Strength 🇯🇵

• JPY reaction has varied in past:
  • Weaker in 2001 (BoJ QE)
  • Weaker in 2022 (Fed tightening)
• Current environment favors JPY strength:
  • Weakening US growth and questioning of US exceptionalism
  • Japan macro and inflation improving
  • BoJ tightening cycle underway

3️⃣ EUR May Hold Up Better Than in Past Bear Markets 🇪🇺

• In previous crises, EUR underperformed vs. USD.
• This time, fiscal expansion, macro resilience, and potential ECB repricing support EUR.
• Potential peace progress in Ukraine and rebalancing of US asset holdings also positive for EUR.

Conclusion:

If US equities experience a major correction, expect broad USD strength driven by risk aversion—but JPY and EUR could outperform other G10/Asia FX due to macro divergence and policy support. Meanwhile, high-beta currencies like AUD, NZD, and KRW remain most vulnerable, consistent with past bear market dynamics.