Currency crunch reflects a world more uncertain than ever | Financial Markets

How long can the yen fall? The Japanese currency is trading at the lowest level against the dollar since 1986, when Spain became part of the European Union (then the European Economic Community), the year of the Chernobyl disaster and the hand of God of Maradona in Mexico. Today each yen is exchanged at 160 dollars, and 170 euros, and has lost a third of its value against the dollar since 2021. Something less, 30%, compared to the euro, a currency against which it is at an all-time low (there were no euros in ’86).

The depreciation of a currency has a double effect: it tends to stimulate activity because it increases exports; These are, in the eyes of foreign buyers, cheaper. The same thing happens with tourism; This year, traveling to Japan costs a third of what it did in 2021. The lowering of the yen has, in fact, caused a sharp rise in tourism to the point that this year the city of Kyoto has closed some of the streets in its most picturesque district. (Gion, the geisha neighborhood) to foreign visitors. The counterpart is that a weak currency also makes imports more expensive, thus generating inflation. In fact, this is one of the arguments that can condition the ECB’s movements: if the euro depreciates because rates are lowered, imported inflation can complicate the 2% objective.

The reason for the yen’s weakness is the wide gap between Japan’s interest rates and those of other central banks, the widest on record. Both the International Monetary Fund (IMF) and the G7 this spring stressed the country’s commitment to a flexible exchange rate regime, “which allows the exchange rate to act as a buffer and support the monetary policy objective of price stability, as well as help maintain an external position in line with fundamentals,” according to Krishna Srinivasan, director of the IMF’s Asia and Pacific department.

The choice of words is no coincidence. The market has been speculating for weeks that the Bank of Japan will intervene again to stem the currency’s fall or at least slow its speed. Masato Kanda, vice finance minister and head of foreign exchange, said this week that authorities are monitoring currency markets with “a high degree of urgency” and would take appropriate measures if necessary. In a world, like the foreign exchange market, where messages are sent like smoke signals, Kanda described the currency’s latest move as “rapid” and “one-sided,” but declined to comment on whether it was excessive. Previous attempts by the Bank of Japan to support the currency have raised some eyebrows abroad, and the U.S. Treasury Department has put the country on a watch list for its foreign exchange activity.

“The weakness of the yen has gone beyond what we and the consensus expected,” explains a report by Natixis IM. “The inertia of the Bank of Japan [manteniendo los tipos al 0%] turned the yen into the funding currency for the global carry trade [operativa consistente en pedir dinero donde los tipos están bajos para invertir en zonas de tipos más altos], and the selling pressure has been so high that the yen has lost its safe haven status.” This refuge status now corresponds almost exclusively to the dollar thanks, in addition to the rate differential, to the very strong pull of the stock market.

Investors’ bets are pushing the dollar even higher against its main peers: the euro, the yen and the yuan

But, as Natixis explains, the currency market is showing more signs of instability. “He has realized the greater political risk in Europe, the protectionism in the United States and Europe and the divergence between the policies of the central banks. “You have to prepare for tectonic changes in the market, and hope for the best.” The Chinese yuan is at 7.25 units per dollar and subject to strong capital outflows, and both due to the tariff war with the United States and Europe and due to internal economic policy (rate cuts and other stimuli) lead to thoughts of new falls. .

The Chinese currency does not float freely, but is restricted to a trading range set by the central bank; it can deviate by 2% from the official exchange rate, and it is trading at this lower limit (7.25 yuan per dollar). Macquarie analysts are considering the country making the exchange rate more flexible by widening the trading band. The last time it made a decision in this regard was in 2014, when it widened the range from 1% to 2%. Bank of America expects the yuan to weaken to 7.45 units per dollar by the fourth quarter, “as the PBoC [banco central chino] continue to carefully manage depreciation. We are more bearish in relation to the Bloomberg consensus,” they indicate from Bank of America.

There is no clear consensus, nor a concrete expectation. It is rather the accumulation of tensions. The market, however, is positioning itself, and bets are on a stronger dollar. Futures markets are pointing to further falls of the Japanese currency against the greenback. According to data from the CFTC (Commodities and Futures Trading Commissionthe U.S. regulator of derivatives and commodities markets), bets against the yen by fund managers are the largest since 2006, according to Bloomberg. Leveraged investors (hedge funds (mainly), for their part, have raised their bets against the euro following the legislative elections in France, which in just a few weeks has emerged as another hot spot in the market.

Citi analysts have developed several scenarios regarding the French election result. In a more positive scenario, which contemplates Macron remaining in office with either a centrist coalition government or a government led by the extreme right that renounces its program, the European currency could climb to $1,081. On the contrary, if either the left-wing coalition or Le Pen’s party govern, maintaining their initial approaches, and Macron also resigns, the European currency could go to $1.04. Experts do not see, at least today, an existential risk for the euro zone. But it has become a focus of tension within a global currency market forced to endure the financial, macroeconomic, commercial and geopolitical tensions that accumulate in 2024. And Trump has not arrived.

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