Effortless Economic Elevation: Canadian Cash Clues – Japan’s low yields make the yen an easy target for short sellers and funding trades as interest rate differentials between Japan and the United States widen, leading to continued weakness in the yen.
The yen had a volatile day against the dollar after falling to one-year lows, climbing above the key 145 level as traders cautiously looked for signs of possible intervention, while the greenback rallied towards the mining high in just over a second .
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In early Asian trading, the yen fell to 145.22 against the US dollar, the lowest level since November 10, 2022, and then reversed sharply. The latest price was 144.96 per US dollar, the same as that day.
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The yen has fallen about 20% since the Federal Reserve began raising interest rates sharply in 2022 to combat soaring inflation, while the Bank of Japan remains committed to its ultra-loose stance.
In September last year, when the U.S. dollar rose above 145 yen, Japan intervened in the currency market, prompting the Ministry of Finance to buy yen, bringing the yen exchange rate back to around 140 yen. The yen depreciated by more than 9% against the US dollar during the year.
With the yen hovering around that level again, traders expect Japanese officials to issue intervention warnings soon.
Saxo market strategists said Japan’s GDP and CPI data this week may be key, as well as U.S. data, which could further push Treasury yields higher.
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“Traders also continue to focus on possible intervention from Japanese authorities, but the lack of verbal intervention so far suggests patience may be needed.”
Treasury yields moved higher again on Friday after data showed U.S. producer prices edged up more than expected in July as the cost of services rose at the fastest pace in nearly a year.
This follows news on Thursday that consumer prices rose slightly in July. The PPI data cast doubt on whether the Fed has completed its rate hike cycle.
Markets are pricing in a near 89% chance of the Fed raising interest rates next, according to CE’s FedWatch tool, with traders predicting little to no chance of a rate hike for the rest of the year.
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Inflation data, along with the latest labor market data, suggest the Fed will keep interest rates on hold at its September meeting, analysts at ANZ said, adding that the central bank will consider a raft of long-term wage data and the Consumer Price Index (CPI) beforehand. Meeting.
The resilience of U.S. consumers will take center stage after July retail sales data, with fuel prices expected to rise and credit conditions to tighten, they said.
The U.S. dollar index, which pushed the greenback higher against six currencies, rose 0.078% to 102.94, its highest level since July 7. The index rose 1%.
The euro fell 0.09% against the dollar to $1.0934, and the pound last traded at $1.2676, up 0.14% on the day.
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The Australian dollar fell 0.48% to $0.647 and the New Zealand dollar fell 0.38% to $0.596. Both currencies were weighed down by disappointing trade and inflation data from China, its biggest buyer of resource exports.
Chris Weston, director of research at Pepperstone, said that despite the easing of anti-China sentiment, this week’s high-frequency Chinese data only needed a sharp rebound to trigger a strong bullish reaction from Chinese agents.
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The relief a weaker dollar brings to the global economy cannot be overstated. Import prices for developing countries will fall, helping to reduce global inflation. Additionally, as sentiment improves, so do the prices of everything from gold to risk assets such as stocks and cryptocurrencies.
Some of the world’s top investors agree that the worst of the dollar mania, which has rocked the global economy in a way rarely seen in modern history, is over.
After hitting generational highs last year – worsening poverty and fueling inflation from Pakistan to Ghana – the currency is now at the start of what some forecasters say is a multi-year slide.
Investors believe the dollar is falling as most of the Fed’s rate hikes are over, while nearly every other currency will strengthen as central banks continue to tighten monetary policy. As the latest data prompts traders to reconsider U.S. interest rates heading higher, there has been a shift away from stocks and toward emerging markets, betting that rates will weaken. Although the U.S. dollar recently recouped its annual losses by raising bearish dollar rates, many investors are still holding on to these rates.
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“The dollar’s peak has definitely passed and there will be structural weakness in the dollar going forward,” said George Buburas, a 30-year market veteran and head of research at hedge fund K2 Asset Management. “Yes, inflation in the United States persists, and yes, interest rate markets indicate that U.S. interest rates will be higher for an extended period of time, but that does not diminish the fact that the rest of the world’s economies are catching up to the United States.”
That could help mitigate some of the damage in 2022, when the impact of a stronger economy wreaks havoc: rising food and oil prices are fueling inflation and pushing countries like Ghana to the brink of debt default. And stock and bond investors suffered significant losses.
As other central banks show similar determination to slow price increases, the dollar’s strength will weaken along with the Fed’s yield premium. Euro zone and Australian policymakers say further interest rate hikes are needed to combat inflation as speculation grows that the Bank of Japan will abandon its ultra-expansionary stance this year.
Swaps data showed U.S. borrowing costs could peak in July as prices rise back toward the Fed’s Central America target, with the U.S. central bank likely to cut interest rates as early as 2024 at its first review.
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Those rates are clearly visible in the U.S. dollar, with the Bloomberg Dollar Spot Index down about 8% since hitting a record high in September. Meanwhile, investors last month bought emerging market bonds and stocks at the fastest pace in two years.
“We believe the dollar has peaked and a multi-year downtrend has begun,” said Sidharth Mathur, head of Asia Pacific emerging markets research at BNP Paribas in Singapore. “We are structurally bearish on the dollar and expect weakness in 2023, especially in the second half.”
Some market participants believe that the Fed chose to raise interest rates slightly in the hope of alleviating price pressures. That view is somewhat inconsistent with the Fed’s assessment that inflation remains a concern and that further rate hikes are needed to get it back to its 2% target.
“The Fed still has a lot of tightening measures in the system that haven’t worked yet,” said Eric Stein, chief investment officer at Morgan Stanley Investment Management. “The Fed said they were going to raise inflation to 2%, but I actually Will say they will raise inflation closer to 3%. I don’t think they will continue to raise rates to 6% because of this.
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All of this means currencies that have suffered under the pressure of a stronger dollar are likely to strengthen. The yen has gained more than 12% against the dollar since hitting three-year lows in October, and strategists surveyed by Bloomberg expect the yen to rise another 9% against the dollar by the end of the year.
The euro is up about 11% from its September lows, while the dollar has fallen against most Group of 10 currencies over the past three months. The Bloomberg J.P. Morgan Asia Dollar Index has risen more than 5% since its October lows.
“Many of the factors supporting the dollar in 2022 have faded,” said Dwyfor Evans, head of Asia-Pacific macro strategy at State Street Global Markets. “Other G10 central banks are pushing for rate hikes if China’s opening up leads to increased global demand conditions. So cautious risk buying is not good.”
Short-term action Some investors have begun testing the theory that the dollar’s dominance is over. Late last year, Abrdn shifted its view on the U.S. dollar from bullish to neutral, while Jupiter Asset Management was directly short the greenback.
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K2 Asset Management has reduced its long U.S. dollar positions since October and expects commodity currencies such as the Canadian and Australian dollars to outperform this year. Likewise, hedge fund bets on gemstones rose to their highest level since August 2021 in early January, while JPMorgan Asset Management’s bet on gemstones rose to its highest level since August 2021.
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