The yen rebounded sharply after the Bank of Japan on Monday, wary of the resurgence of the yen carry trade in the yuan

Mars macroscopic

2024-05-01 06:00Posted in Hunan Finance and Economics Creators

Executive Summary:

The yen fell below 160 yen per dollar on Monday before resuming strength within a few hours. The yen fell to a 34-year low on Friday as the Bank of Japan kept interest rates near zero. The "yen arbitrage" trade contributed to the sharp decline of the yen. Through the impact of "yen arbitrage" transactions on the exchange rate, the central bank needs to be wary of the "RMB arbitrage" transactions that may be formed by the continuous reduction of RMB interest rates.

1. The yen fell below 160 yen per dollar on Monday and then resumed its strength within a few hours.

The yen-dollar exchange rate was thrilling on Monday.

At the opening of Monday morning, the yen continued its decline against the dollar on Friday, falling below 160 to 160.2 yen at 9:35, and was quickly pulled back to around 159.5 sideways, starting at 12 noon, there were large purchases of yen, and an hour later the yen was pulled back to 155.2, and a few minutes later, a large amount of yen buying funds reappeared, pulling the yen to an intraday high of 154.52, and finally closed at 156.71 yen on Monday, up 1.04% from last Friday.

The yen strengthened sharply in Asia on Monday, rebounding sharply from a 34-year low hit a few hours earlier, sending the dollar index down to 105.71 on Monday from 106.08 on Friday, sparking speculation that the Japanese authorities warned weeks ago that they would intervene to support the yen if the yen fell rapidly.

Starting around 1 p.m. on Monday, the yen rose from 159.5 yen per dollar to 155.2 yen in 50 minutes, which was the first wave of strong rally. From 1.05 to 155.2 yen per dollar to 154.52 yen per dollar at 3.35, this is the second break. These two waves of rally are particularly concentrated and powerful, and it is unlikely that they are the result of normal market demand, and they are likely to be traces of the BOJ's intervention in buying yen and selling dollars.

Earlier in the day, the yen fell below 160 against the dollar, a level that many traders believe will force Japan to intervene for the first time since late 2022. By Monday afternoon, there was a clear perception in the market that a break above the 160 yen level forced Japanese officials to act, although they had no conclusive evidence that the intervention had occurred. Because the volatility of market trading and speculation will most likely convince some investors to unwind some of the huge bets they have accumulated on the yen in recent weeks.

For weeks, Tokyo has been warning that it will be ready to support the yen if trading becomes too volatile. Bank of Japan Governor Kazuo Ueda said in mid-April that the BOJ could take action if the impact of a weak yen was "too big to ignore".

Second, the yen fell to a 34-year low on Friday as the Bank of Japan kept interest rates near zero.

The yen's decline accelerated after the Bank of Japan announced on Friday that it would keep interest rates near zero.

After the Bank of Japan ended its negative interest rate policy last month, as it was the first time since 2007 that it raised borrowing costs, the BOJ and = Governor Kazuo Ueda have also previously said that any further tightening will be gradual. As a result, investors did not expect a rate hike last week.

But the depreciation of the yen and signals that the Fed will have to keep interest rates high to curb inflation have complicated the BOJ's stance, leading to speculation that the central bank may hint at further rate hikes later this year.

But on Friday, Bank of Japan policymakers voted unanimously to keep the yen's benchmark interest rate in a range of 0% to 0.1%, unchanged from last month's rate.

The yen retreated sharply in 30 minutes late on Friday from 154.99 yen before the news as the yen's expected rate hike fell through. The Japanese yen fell as low as 157.78 against the dollar. The Japanese yen closed sharply lower than Thursday against the dollar on Friday, down 1.37% from Thursday.

Since the Fed raised interest rates in March 2022, the yen has continued to weaken. At the end of 2023, the yen fell by 18.48% against the dollar from 114.99 yen at the end of February 2022 before the US dollar raised interest rates.

With the Fed saying interest rates may need to remain high to tame inflation, the huge difference could last longer than expected. The yen depreciated against the dollar by about 9.8% between the dollar's policy high interest rate of 5.5% and Japan's near-zero interest rate from the beginning of the year to April 29.

Third, the "yen arbitrage" trade has contributed to the sharp decline of the yen.

Shusuke Yamada, head of Japan foreign exchange and interest rate strategy at Bank of America, said the "yen arbitrage" trade, in which investors borrow yen cheaply to fund investments in high-yield assets, is unlikely to start to dwindle significantly before the Fed starts cutting interest rates.

This kind of "yen arbitrage" trading involves borrowing low-interest yen from Japan and then buying high-interest U.S. dollars, and the fee is negligible in the face of the difference between the U.S. dollar and the yen's real lending rate approaching 4%. Based on the inertia of interest rates, that is, the depreciation of the yen and the appreciation of the dollar, when the yen is returned to the yen, not only can the interest rate differential between Japan and the United States be obtained, but also an exchange rate difference can be obtained. As a result, the "yen arbitrage" trade became the main driver of the yen's decline in addition to the dollar-yen interest rate differential.

Keeping the yen above 155 yen per dollar will require sustained intervention by the Japanese authorities to buy time until the Bank of Japan raises interest rates, or the Federal Reserve cuts rates, a move that is currently not expected for at least three months, Yamada said in a note. He added that any intervention would need to be larger than the series of interventions that Japan carried out in 2022, which totaled about $62 billion.

But Benjamin Shatil, a senior Japan economist at JPMorgan, said that even if the Japanese authorities intervene, the effect could be very limited, as investors will continue to take advantage of Japan's low interest rates and use the yen as a funding currency.

Regarding the sharp fall in the yen on Friday afternoon, the governor of the Bank of Japan, Kazuo Ueda, said that the weakening of the yen has "no significant impact" on the underlying inflation trend in Japan.

The depreciation of the yen has boosted inbound tourism and fueled a surge in profits earned overseas by Japanese companies. But in recent weeks, Japanese business leaders have begun to call on the Japanese government to act, as the depreciation of the renminbi has also raised the prices of consumer goods, mainly from China, raising the cost of living and hitting domestic consumption.

At the same time, in terms of monetary policy and economic data in the United States, the rebound in inflation and strong consumption mean the difficulty of the Fed's decision to cut interest rates, so Friday's turmoil in the yen may just be the beginning of a very volatile period for the yen. In order to maintain the basic stability of the yen, the yen's intervention in the exchange rate has become a necessary option for Kazuo Ueda.

Fourth, through the impact of the "yen arbitrage" transaction on the exchange rate, the central bank needs to be vigilant against the "RMB arbitrage" transaction that may be formed by the continuous interest rate cut of the RMB.

Although the yen is the world's fourth most traded currency and reserve currency, for Chinese, the yen's rise and fall has little impact. However, the focus of Saburo's analysis article is that the monetary easing cycle of RRR and interest rate cuts that our central bank started at the end of 2021 may form a relatively long monetary easing cycle rarely seen in history due to the constraints of the economic development model, high debt, and insufficient consumption capacity, which has limited effect on the macro economy.

Some people like to compare such a cycle with Japan's 30-year deflationary cycle, but Saburo believes that it is not necessary, because the economic model and economic structure are completely different, and crucially, the official is also more taboo against such analogies.

At present, our M2 has exceeded 300 trillion in March, and the stock of social financing is less than 10 trillion yuan away from 400 trillion yuan, and it is not surprising that it will exceed 400 trillion yuan in August this year. In 5 months, our macro leverage will be a staggering 311%.

With such a large amount of capital investment, although the GDP comparable price increased by 5.3% in the first quarter of this year, the current GDP corresponding to debt increased by only 3.96%. In other words, the increase in GDP is less than the interest payable on debt.

Therefore, the voices of all sectors of society calling for continued interest rate cuts are relatively strong.

However, the central bank needs to be vigilant in the process of continuing to cut interest rates, when the interest rate differential between the RMB interest rate and the US dollar interest rate breaks through a certain level, resulting in a profitable "RMB arbitrage" transaction, the yen arbitrage trade that occurs on the yen will inevitably occur on the RMB. This will put greater pressure on the stability of the RMB exchange rate.

[Author: Xu Sanlang]

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Personal opinion, for reference only