The Mechanics of Shin Kawasaki
April 25, 2021 (Sunday) Sunny and then cloudy
・Dynamics of Shinjinkawase: The yen moves with U.S. interest rates and vaccines
The yen, previously teased as a “dead-flat” movement against the dollar due to small price ranges, suddenly shows activity.
From March, the difference between the high and low widened to about 5 yen, more than doubling the 2-yen range seen in the late 2010s.
Since the start of the year, it has moved about 8.30 yen, surprising market participants accustomed to a stalemate.
・Dynamics of Shinjinkawase: The yen moves with U.S. interest rates and vaccines
It was the domestic forex margin trading individual investors, “Miss Watanabe,” who drew attention.
Capital flows that had sought profits in emerging market currencies returned to the dollar/yen trading as profitability opportunities revived.
According to the Financial Futures Association, yen-dollar open interest in March rose 20% year on year.
・Dynamics of Shinjinkawase: The yen moves with U.S. interest rates and vaccines
The current major theme in financial markets is the normalization of the economy from the COVID-19 pandemic.
With the spread of COVID-19 vaccines and a strong recovery in consumption, voices expecting an improvement in the U.S. economy and rising interest rates persist.
As U.S. long-term yields began to rise, the market’s attention turned again to the interest-rate differential.
・Dynamics of Shinjinkawase: The yen moves with U.S. interest rates and vaccines
On the 21st, the Bank of Canada (central bank) decided to taper, and the Canadian dollar rose in the foreign exchange market.
Canada, like the United States, moved toward normalization early thanks to vaccine dissemination.
The spread of rates and the vaccine rollout are moving global foreign exchange markets.
・Dynamics of Shinjinkawase: The yen moves with U.S. interest rates and vaccines
On the other hand, Japan lagged in vaccine rollout.
Current account surplus and the size of external net assets have not changed, but their influence has diminished.
The status of the yen as a “safe haven” is also wavering.
Japan, which holds the world’s largest external net asset position, has seen its composition change significantly in the past decade.
Growing public debt is accelerating the decline in the yen’s status.
・Dynamics of Shinjinkawase: Two forces broke the stalemate in yen/dollar
As COVID-19 vaccines progress worldwide, the forces driving exchange rates are changing in foreign exchange markets.
With improving economic outlook boosting U.S. long-term rates, the “supply-demand balance” weakens, while current account and other fundamentals lose influence.
The status of the yen as a “safe currency” also shows signs of weakening.
・Dynamics of Shinjinkawase: Two forces broke the stalemate in yen/dollar
Influence Up: U.S. long-term rates again take the lead; the real yield is key to a revival in dollar strength.
Looking again at the quiet U.S. bond market,
the focus returns to how strong the U.S. economy is and how the Federal Reserve’s policy will proceed.
Risks remain in the dialogue between the Fed and the market.
Although expectations of aggressive rate hikes have subsided, the tapering of asset purchases remains a difficult achievement to be gradually priced in by the market.
As long as the U.S. economy normalizes ahead of Japan and other advanced nations, the timing of the Fed’s policy shift will gradually close in.
U.S. rates are almost certain to face upward pressure from time to time.
A scenario of renewed dollar strength is fully conceivable.
・Dynamics of Shinjinkawase: Two forces broke the stalemate in yen/dollar
Influence Up: Vaccination progress also linked; the British pound rises sharply, while the yen and euro remain soft
Vaccination progress in each country is also watched as a factor.
If vaccines spread domestically and herd immunity is achieved, consumption improves and the economy normalizes.
If the real economy recovers, monetary policy still in a historically accommodative phase will begin to exit, and rising interest rates will contribute to currency appreciation.
What market participants envision is such a scenario.
The United Kingdom’s vaccination rate is about 60 per 100 people, the highest among advanced nations, and the British pound has risen by about 3%.
The currencies of the United States (about 60 doses per 100) and Canada (about 24 doses) also rose by around 1.9%.
Japan’s vaccination per 100 people remains under 2, and the yen’s nominal effective exchange rate has fallen more than 4% since the start of the year.
The euro area and Korea are also lagging in vaccination, and their currencies are in a downward trend.
As long as market interest in vaccines remains strong, it could help limit the yen’s upside.
・Dynamics of Shinjinkawase: Two forces broke the stalemate in yen/dollar
Influence Down: Trade and investment… “real demand” fades
Increasing direct investment makes “safe-haven” yen purchases less likely in crisis.
As interest-rate differentials, vaccination rates, and the yen’s market presence in foreign exchange grow, the impact of “real demand” has weakened.
The yen’s traditional strength as a safe asset during international conflicts or crises has also changed.
In a deteriorating market mood, the yen tends to be bought because Japan is the world’s largest holder of external net assets.
In crises, Japanese investors sell foreign assets and convert to yen,
leading to yen appreciation and dollar depreciation, a risk-off yen rally created by speculators buying yen.
However, looking closely at external net asset changes shows that immediate yen-buying in crises has become less likely.
In the United States, where consumption recovers ahead of the world, imports are strong, and the February trade deficit was the largest on record for a single month.
Exporters sell the dollars they earn for their own currency.
This could lead to dollar weakness and potentially to yen appreciation.
・Dynamics of Shinjinkawase: Two forces broke the stalemate in yen/dollar
Influence Down: The “yen depreciation → stock rise” scenario breaks down
There is a risk of accelerated yen selling at overseas production bases
The relationship between the yen and Japanese stocks is also changing. The pattern of “yen depreciation → corporate earnings improvements → stock gains” has been breaking down in recent years.
In the past, when yen depreciated, Japanese stocks rose, and foreign investors funded yen to buy Japanese stocks.
In other words, the era of “yen depreciation = stock rise” was supported by foreign investors buying yen to curb yen weakness.
But now that this pattern has collapsed, once yen weakness starts, there is a risk of it accelerating without restraint.
・Dynamics of Shinjinkawase: Various foreign currency investments, what is the current situation?
There are various methods of foreign currency investment
Exchange into foreign currency notes: Pros — easy currency exchange procedures. Can be used for payments. Cons — high fees. No interest. Theft risk
Foreign currency deposits: Can use deposited foreign currency for transfers and settlements. High fees. Normal savings accounts offer low interest
Foreign currency MMFs: Fees are relatively low. Interest rates are relatively low
Foreign currency bonds: Fees are relatively low. Interest rates are relatively high. Risks include delayed interest payments and default
FX trading: Very low fees. Can start by selling foreign currency. Large gains from exchange rate movements, but large exchange losses are possible
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