At one point, the yen-dollar exchange rate touched the 139 yen per dollar range. The opportunity is the U.S. Federal Reserve Board (FRB) to start a substantial interest rate cut is expected to re-emerge, but the yen strengthened the background of the U.S. economic outlook is worrying and Japan and the U.S. interest rate differentials narrowed. However, Japanese households to buy overseas assets, such as “structural yen selling” still exists, the yen appreciation is difficult to develop in one direction.
The Federal Reserve will be held on September 17 ~ 18, the U.S. Federal Open Market Committee (FOMC) meeting. According to U.S. news agency Bloomberg reported that the Federal Reserve Bank of New York, the former president of the Dudley September 13 activities held in Singapore, said the Federal Reserve, “there is a strong basis for a 0.5% interest rate cut.
This is two times the normal rate cut of 0.25%, allegedly compared with the rekindling of inflation, the risk of deteriorating employment in the future is to support the rationale for a significant rate cut.
Expectations of a 0.5% rate cut reach about 60%
According to the price fluctuations in the interest rate futures market to calculate the market to consider the benchmark interest rate forecast of the “Federal Reserve Watch (FEDWatch)” shows that the forecast of the FOMC meeting to start the 0.5% interest rate cut is expected to reach about 60%. Presented the market urged the Federal Reserve to sharply lower interest rates. Due to the U.S. rate cut is expected, the yen is easy to appreciate.
Typically, the exchange rate is easily linked to interest rate differentials. This is because currencies with high interest rates are more likely to be bought and currencies with low interest rates are more likely to be sold. The linkage between the Japan-U.S. interest rate differential and the dollar-yen exchange rate weakened for a while, but is recovering recently.
The U.S. 2-year Treasury yield, which is easily linked to the benchmark rate, fell to 3.56% at one point on the 13th, and the difference between the Japanese and U.S. 2-year Treasury yields, which once exceeded 4% going into 2024, has narrowed to about 3%. With the Japan-US interest rate differential narrowed, the yen against the dollar continued to appreciate, hitting a level of more than 140 yen per dollar.
In early July the yen against the dollar depreciation once reached 161 yen or so in the situation, the yen against the dollar exchange rate and interest rate differential linkage becomes weaker, in the interest rate differential turns to narrow the situation of the yen is still depreciating. after late July the linkage is again strengthened, easy to shift to the yen against the dollar appreciation.
There were two main reasons for the resumption of linkages.
First, speculators selling yen behavior has ended. Previously, there was the view that “the Bank of Japan (central bank) to tighten monetary policy is cautious, even after the U.S. interest rate cuts, the gap between Japanese and U.S. interest rates will not be significantly narrowed,” the speculative funds to expand the short position in the yen.
This is one of the reasons for the “super yen depreciation” that is difficult to explain only by the interest rate differential, but after the Bank of Japan’s monetary policy meeting at the end of July, the positive attitude toward further interest rate hikes became apparent, and the yen sell-off disappeared.
The sense of caution about the U.S. economic outlook is increasing, which is the main reason for the easy formation of yen appreciation.
The opportunity was the U.S. employment data for July released on August 2nd. This data violated the “Sam’s Rule”, which is a rule of thumb that says that if the unemployment rate rises more than the market expects and the average unemployment rate for the last three months is 0.5 percentage points higher than the lowest point in the past year, there is a high probability that a recession has already begun.
Market stakeholders will avoid a recession while inflation stabilized “soft landing” as the main expectations. released on September 6, the August U.S. employment data mixed, did not appear to be economic concerns quickly strengthened the situation.
The market is wary of a sharp deterioration in the employment environment, the Federal Reserve rate cuts too late. The Federal Reserve acknowledged that the time to cut interest rates is approaching, but the pace of rate cuts still adhere to the “data-dependent” position.
Structural yen sell-off
The yen will appreciate to what extent? The market is concerned about whether the yen will exceed the July 2023 record level of 137 yen per dollar.
”Overall, there are more market participants betting on the direction of yen appreciation, and fluctuations in the direction of yen appreciation are prone to expand,” said Kazushige Beta, head of the financial markets department at the Tokyo branch of State Street Bank (State Street). The U.S. Commodity Futures Trading Commission (CFTC) statistics show that speculators are increasing long yen positions.
There is also a view that yen appreciation is difficult to develop in one direction. This is because the yen is considered to be one of the reasons for the depreciation of the “structural yen selling” is still continuing.
For example, household investment in overseas assets in Japan based on the new NISA (small investment tax exemption system) and the related selling of yen. If an individual buys an overseas equity-based investment trust, a transaction of selling yen and buying dollars occurs, which becomes a factor depressing the yen exchange rate. Judging from statistics from Japan’s Ministry of Finance, this momentum has not waned even in August, when the stock market was in violent turmoil.
Fukuoka Financial Group’s chief strategist, Sasaki Yutaka, said: “Japan’s real interest rates are still in the negative range, and from the balance of payments, the yen’s appreciation is limited in the case of continued capital outflows.”
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