The Outlook of Foreign Exchange Markets Going Forward, 第110回［田嶋智太郎］

Tomotaro Tajima profile

Economics analyst. Alfinns president and CEO. Born in 1964 in Tokyo. After graduating from Keio University, he shifted career from Mitsubishi UFJ Securities (the current entity). He analyzes and researches a wide range from finance and economy in general to strategic corporate management, and even individual asset formation and fund management. He serves as a lecturer at lectures, seminars, and training hosted by private companies, financial institutions, newspapers, local governments, and various chambers of commerce and industry, with about 150 lectures per year. He has written numerous serialized pieces and commentary in print media, such as Weekly Gendai’s “The Rules of Net Trading,” and Examina’s “FX Money Maestro Training Course.” He has also written columns on stocks, foreign exchange, and more for numerous websites, earning high regard as a stock and forex strategist. He also contributes to Homen economy sections of Jiyu Kokuminsha’s “Gendai Yogo no Kiso Chishiki.” After regular appearances on television (TV Asahi “Yajiuma Plus,” BS Asahi “Sunday Online”) and radio (MBS “Meiji-chan no Asai-chi Radio”), he is currently a regular commentator on Nippon Television Network’s “Market Wrap” and Daiwa Securities Information TV’s “Economy Marche.” His main DVDs include “Super Easy. Tomotaro Tajima’s FX Introduction” and “Super Easy. Tomotaro Tajima’s FX Practical Technical Analysis.” His major books include “Manual for Revising Your Wealth” (Paru Publishing), “FX Chart ‘Profit’ Formula” (Alchemix), and “Why Can FX Make Your Assets Rich?” (Text), among many others. His latest publication is “How to Profit by Riding the Rising U.S. Economy.”

※This article is a republished and edited version of an article from FX攻略.com June 2019 issue. Please note that the market information described in the text differs from the current market.

What was the impact and truth of the “inverted yield curve” arising in the United States?

At the time of writing this article (late March), an unusually unsettled atmosphere hovered over the international financial markets. The direct trigger was that on March 22, during New York time, the yield on the U.S. 10-year Treasury briefly fell to 2.416%, briefly falling below the yield on three-month U.S. Treasury bills (T-bills), creating an “inverted yield curve.” This was the first time since the subprime shock era in 2007, causing market chatter about whether the U.S. economy had entered a downturn, and briefly causing a rollercoaster of activity.

As a result, the Dow Jones Industrial Average fell by 460 points from the previous close on the same day, and on the Tokyo market Monday the 25th, the Nikkei Stock Average temporarily dropped more than 700 points intraday (closing down by the largest amount of the year).

My frank impression is that this was a somewhat excessive reaction, and the word “inverted yield curve” seemed to take on a life of its own. As expected, the situation soon began to ease. In fact, the Dow rose on March 25 from the prior weekend close, and on March 26 the Nikkei rose 451 points from the previous close.

Here, it is important to organize thoughts a bit. First, the excessive reaction in U.S. and Japanese equity markets appeared to be driven by algorithms highly sensitive to the word “inverted yield curve.” It is believed that reflexive orders to buy U.S. Treasuries or sell U.S. stocks were automatically executed.

In particular, financial stocks, mainly U.S. bank stocks, were targeted for profit-taking. Looking back, U.S. financial stocks had already rebounded from a heavy late-2018 decline, and were in the process of a substantial recovery from the start of the year, so the sudden insertion of the “inverted yield curve” term was particularly destabilizing.

In the first place, the inverted yield at this time arose because the temporarily high three-month rate remained elevated while the ten-year yield dropped sharply. As you can see, U.S. economic activity was robust, hence strong demand for funds tends to push short-term rates higher.

The key driver of the sharp drop in the U.S. 10-year yield is thought to be a misstep or misread by the Federal Reserve Board (FRB) in its policy management. As widely known, the FOMC statement and Powell’s press conference in late March gave the market a stronger impression of dovishness than expected. If behind that impression lies a backdrop of rumors about a “Donald First” basic stance of the current U.S. administration, then the Fed’s missteps may be understandable.

Of course, it is extremely regrettable if the Federal Reserve’s policy management becomes entirely aligned with the president’s wishes. The Nihon Keizai Shimbun on March 22 carried a note reading “Trump ahead,” and if the situation is really discussed at that level, one must say U.S. policy management has fallen. Of course, that is likely to be the root of the market’s unease.