Shine Trader Live reports:
Recently, the dollar against the yen weak, 110 mark for the dollar/yen is relatively difficult to be effectively break through barriers, the position corresponding to the two high in April and July, 110 mark for the success of site is the focus of investors (below), we believe that the periodic strong trading level rather than fundamentals.
Japan’s economic fundamentals are weak
A few months ago, we analyzed that, unlike most advanced economies, the post-pandemic “flood” did not stimulate huge domestic demand in Japan. The most closely watched measure of inflation shows that the Fed and the U.S. government are still wary of inflation, while Japan is relatively stable. Although inflation has picked up somewhat, it is far from the market’s target.
In addition, the Tokyo Olympics did not provide much of a boost to Japan’s economy. The Tokyo Olympics and Paralympics, which ran from July 23 to September 5 without spectators, lost more than 100 billion yen in ticket sales alone. Although foreign delegations, athletes and media reporters who come to Japan to participate in the Olympic and Paralympic Games will generate certain consumption during the games, there is no way to compare with the economic benefits generated by the normal hosting of the Olympic Games.
Based on the inflation data and what happened with the Tokyo Olympics, we can basically conclude that the recent appreciation of the yen has little to do with the Japanese economy per se.
However, all opinions in the market are not always set in stone, with UBS recently raising its earnings growth forecast for Japan to 42% and 8% for fiscal 2021 and 2022, as Japanese stocks tend to be cyclical and thus better positioned to benefit from the global economic recovery. Ubs Wealth Management’s investment director’s office said it believed the Japanese market had further upside.
Carry trades dominate the recent yen exchange rate
Further research shows that fundamentals in Japan are weak and the yen remains strong thanks to the carry trade. The yen carry trade became popular around the beginning of this century, when It was popular for Japanese companies to borrow in yen at low interest rates and convert large amounts of yen into dollar assets, earning the return on financial assets and easily winning.
Every coin has two sides. This changed with the financial crisis of 2008, when interest rate differentials between Japan and Japan narrowed and the yen began to appreciate sharply. After the outbreak, the fed’s interest rate cut, also caused a lot of carry money outflow, the euro yen cannot earn spreads in dollar assets, its appearance is a lot of cheap money, cause all kinds of assets were sold in the United States, double strands of debt, even gold didn’t survive, and the Japanese yen appreciation against the dollar has appeared for eight months.
Looking back on the past data, the market panic was almost synchronized with the Federal Reserve’s interest rate cut. According to the statistics of the market panic from the 1990s to now, the safe-haven attribute of Japanese yen was greater than that of US treasuries and Chinese bonds, and far greater than that of gold and the DOLLAR. There is no doubt that the carry trade was the main driver behind the yen’s rise, and in that sense yen carry probably started in the 1990s.
As an important international currency, the yen is the world’s fourth largest currency, not only has the huge amount of assets, next to the dollar, the euro still in cross-border capital flows enjoys a high degree of freedom, can in a short period of time in and out of a lot of money, liquidity is extremely abundant, plus the special relationship, the yen carry trade can appear and continue. The fall in US bond yields over the past few months has been an important reason why the carry trade has stopped and the yen has fled to safety.
The weak yen exchange rate will not change in the future
The downward trend of the yen in 2020 is partly due to the absence of a post-epidemic basis for carry trade and partly due to the weakening of the US dollar. With the us bond interest rate rising, the carry trade reappeared, coupled with high inflation, the Probability of the Federal Reserve tightening monetary policy increased, which caused the DOLLAR index to rise. The combination of these two factors has once again led to a strong dollar and a weak yen.
By the end of June, the DOLLAR index turned into a wide volatility, 10-year US Treasury yields continued to decline, and the yen carry trade spread gradually narrowed in early July, with the intention of returning home. Hence the yen’s renewed strength in the third quarter.
To sum up, we believe that in the short term, in the environment without a safe-haven demand, the yen carry trade size is not possible, the yen will not flooded back home, is more likely to maintain this level for a period of time, that is, the probability of transaction level about the yen is low, the yen late performance depends more on fundamentals. Japan’s weak economic fundamentals are the main reason to restrict the appreciation of the yen, so we short – term bearish yen exchange rate of the main tone unchanged.
Reprint indicated source：Shine Trader Limited Live information