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17 Mar 2016
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17 Mar 2016
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04 Mar 2016
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04 Mar 2016
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 Thursday 17 March 2016

PM Bulletin: USDJPY

 

 

There can be little doubt that central banks around the world would like to push their respective currencies lower, no matter what they may claim to the contrary. For a start, a cheaper currency helps exporters sell their products overseas. It also makes imports more expensive so is good for a country’s trade balance. It is inflationary as it takes more of the currency to buy the same amount of goods, and we all know how desperate the Bank of Japan (BOJ) and ECB (in particular) are to boost inflation. This isn’t just so they can claim to be clever in steering their economies towards their somewhat arbitrary inflation targets. The real reason is that inflation erodes debt. Of course, the problem is that currencies trade in pairs, so they can’t all weaken at the same time. So, countries either tacitly agree to work in a coordinated manner, waiting their turn to weaken or there’s an all-out currency war. I’m not quite sure where we are at the moment.

At the end of last year Japan’s government debt to GDP stood at 229%. The country posted a GDP growth rate of just 0.7% for the twelve months to December 2015, and GDP in the fourth quarter last year was -0.3%. So the economy isn’t exactly humming along, despite the implementation of Prime Minister Abe’s triple-arrow stimulus measures. As for inflation, well there still isn’t any.

One would expect the yen to be on its knees, particularly after the BOJ adopted negative interest rates at the end of January. But it’s just not working out that way of late as can be seen in the daily chart of the USDJPY below:



The dollar has fallen, and the yen has strengthened, ever since last summer’s China-inspired market turmoil. Part of the problem is that financial institutions take advantage of Japan’s low interest rate and sell (borrow) the yen to buy higher-yielding (and riskier) assets such as equities. When investors are fearful and reduce their equity holdings, they buy back the borrowed yen. As we know, the major global stock indices hit their all-time highs in the first half of last year. They haven’t yet recaptured these levels as there’s still a lot of nervousness around the global economic outlook. Investors haven’t been anxious to sell the yen to such an extent.

Last night the US Fed released a dovish statement. The USDJPY fell sharply and broke below 111.00 this morning. Suddenly it rallied, and the rumour is that the Bank of Japan was “checking rates” which is generally a precursor for intervention. If so and if it’s now the dollar’s turn to weaken, then the BOJ will have its work cut out trying to keep a lid on their currency.


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Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Tagged: Bulletin PM

Category: PM Bulletin


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