As usual, an excellent analysis by Richard Katz. Why is the JPY so weak?
1. Momentum trading. The yen is getting cheaper so it will always be getting cheaper. Until it doesn't.
2. New NISA investments in USD assets - Mrs Watanabe wants 50% USD assets
3. USD payments to Google, Facebook, Twitter, Microsoft, Apple, Amazon
4. Japanese companies not repatriating cash
4. Interest rate differential
Richard's book is excellent and I recommend for summer reading while you are escaping the summer Tokyo furnace.
Yen Buzz on Wall Street! BGC Gambles Big on Japan's Rate Rollercoaster 🇯🇵
Remember those whispering rumors about Japan ditching its super-low interest rates? Well, hold onto your wallets, folks, because those whispers have turned into a full-blown yen trading frenzy!
Let's unpack this financial fiesta:
📌 Yen Bets Explode Like Fireworks: Imagine the Japanese yen, usually quiet and reserved, suddenly bursting into a neon party of trading activity. Record volumes of yen derivatives are being bought and sold as investors hedge their bets on potential interest rate hikes in Japan.
📌 BGC Makes a Bold Bet: With the yen storm brewing, BGC sees an opportunity. They're jumping into the derivatives market like a sumo wrestler into a ring, hoping to cash in on the trading boom.
📌 Is It a Winning Gambler or a Yen Yell-Out?: But the future's as murky as a Tokyo alleyway at night. Will Japan actually raise rates?
Share your predictions for the future of the yen and keep the financial chatter buzzing!
Yesterday we talked about why companies would execute share buybacks. In light of all the news around the Yen and the Bank of Japan's rate hikes, it's timely to explore currency-hedged ETFs as a strategic approach for international investors facing fluctuating currency markets.
What are Currency-Hedged ETFs?
Currency-Hedged ETFs are a specialized type of exchange-traded fund that invests in foreign stocks or bonds while employing financial instruments to hedge against currency risk. These ETFs provide investors with exposure to international markets, effectively neutralizing the impact of currency movements on investment returns. This characteristic is particularly valuable in periods of significant volatility in the forex markets, allowing investors to concentrate solely on the performance of the underlying assets without the added concern of currency depreciation affecting their returns.
How Currency Hedging Works
The process of currency hedging utilizes financial derivatives, such as forward contracts or options, to secure future exchange rates. When a Currency-Hedged ETF implements a hedging strategy, its goal is to safeguard the investment from potential losses that could arise if the currency of the underlying investments depreciates against the investor's home currency. For example, a UK-based investor with a Currency-Hedged ETF in US stocks would not suffer losses if the pound were to strengthen against the dollar, as the hedging strategy would compensate for any currency-related losses.
Real-Time Example: The Popularity of Currency-Hedged ETFs in Japan
Currently, Currency-Hedged ETFs are gaining significant traction in Japan, largely due to the country's persistent ultra-loose monetary policy. This approach contrasts sharply with the aggressive rate hikes by global central banks aimed at curbing inflation, leading to a substantial surge in the US dollar against the Japanese yen—more than 30% in recent times. The resultant volatility and unpredictability of currency movements, especially the dollar's strength against the yen, render Currency-Hedged ETFs an appealing option for investors, particularly those from the US, looking for a more stable investment avenue in Japanese equities without the direct exposure to currency risk fluctuations.
#MiriamFinancial#Forex#FX#Currency#Hedging#Investinghttps://lnkd.in/eYYbwTn5https://lnkd.in/ett2xRc4
Image Credits: Bloomberg
The yen just fell to a 34-year low vs, the $. Why is this important?
Because it might cause market volatility and a mini-stampede out of US Treasuries, junk bonds, emerging market debt, and equities as investors unwind their lucrative yen carry trades.
The large interest rate difference between Japanese government bonds (1%-ish) and US Treasuries (4.25%-ish) allows institutional traders like hedge funds to "borrow" yen, buy US Treasuries and other global bonds, and earn the difference in interest rates.
That's until the Japanese government warned it would start buying yen to prop up the yen's value, causing the yen carry trade to stop working so well.
That's a problem for all the investors who've borrowed yen to buy other assets. They may start to close these positions to protect themselves.
The bottom line is that the yen hitting a 34-year low may seem disconnected from US investors, but it's all connected, and it might matter greatly to your portfolio soon.
#investments#yen
NOT INVESTMENT ADVICE. DO YOUR OWN RESEARCH.
Richard Katz writes as if "speculative frenzy" and loosened controls on foreign investment were mutually exclusive explanations for the weakening yen. Are they?
The Shiller (CAPE) index for the U.S. stock market is above 1929 levels. The Case-Shiller home price index -- measuring departures from rational valuations in a much larger asset class -- is at over twice the level it reached in 2006. And if you're in Japan, a fool or speculating on Greater Fools, that's quite alluring, even though it's a trap.
One hidden assumption in Katz' post: that asset valuations in the U.S. are rational, and that Japanese investors are rationally choosing to invest more in the U.S. From this he concludes that the weakening yen must owe to some fundamental weakness in the Japanese economy. Because, y'know, Japan: what a loser. Because it's so overregulated!
But what if it's more that the Japanese retail investor is human, and the average investor can get infected with bubble mentality? I actually live and work right above some of the evidence. I'm writing this in a building owned by our family business, but sitting on land that the government owns. The family used to pay only nominal rent to the former landowner, who didn't care about rental income very much. He bought the land underneath in Japan's bubble era because surely it would appreciate dramatically. He ended up giving it to the government in lieu of back taxes after the bubble burst and he went bankrupt. So now we pay nominal rent to the government instead -- which, like private landowners, can only increase land rent by a certain percentage each year. It's a regulation that came out of the bubble period.
So don't tell me that the Japanese are irrationally prone to crippling overregulation, but rationally immune to bubblethink. You might try down the street, however: Mrs. Watanabe, the online noise trader who thinks her forex sideline will be handsomely profitable Real Soon Now. She's always interested in a good investment story.
NYC Correspondent, Weekly Toyo Keizai; Substack called Japan Economy Watch (URL in contact info); my latest book is The Contest for Japan's Economic Future: Entrepreneurs vs. Corporate Giants
Yen Going to ¥170/$?
Some notable experts see ¥170/$ on the horizon. Sumitomo Mitsui DS Asset Management’s lead portfolio manager recently stated that, while intervention could interrupt the process, “in the long term, the yen will continue to weaken toward 170.” Others, like Mizuho Bank, project ¥170 as a possibility, rather than a forecast. That doesn’t mean they are right. After all, at the beginning of the year, the consensus forecast was in the ¥130s. However, as of mid-June, a record-high share of trades was betting on a weaker yen.
It’s no longer just the gap between American and Japanese interest rates that is sending the yen downward. Until December, the rate gap was an extremely accurate predictor. Since then, however, the yen has steadily weakened even though the rate gap is no bigger than it was back then,
One theory is that this is just a speculative frenzy. If that were the whole story, Tokyo’s currency intervention would have had a bigger impact for longer. A more persuasive theory is that several shifts in economic fundamentals are weakening the yen. One is the new tax advantages on NISA investment accounts that came into effect this January. Barclays Securities recently estimated that an enormous ¥12 trillion ($74 billion) in NISA money could be invested overseas this year. If true, that would offset half of the entire current account surplus. The latter surplus—the trade surplus in goods and services plus income from overseas investments—is the main source of net demand for the yen. A new development erasing half of that demand could explain much of this year’s ratchet. But NISA is just one of several shifts in fundamentals.
For details, see https://lnkd.in/eFMX7x_e#yen#yendepreciation#interestrate#NISA#Currentaccountsurplus#digitaldeficit#reinvestedoverseasprofits
5 Things to Know - Thing 2) The Bank of Japan is Being Forced to Act:
DKI Takeaway: Trillions of dollars have been invested in the “carry trade” which involves selling low-yielding Japanese Government Bonds and buying higher-yielding US Treasuries.
This strategy provided guaranteed profits on the difference in bond yields, but came with the risk that the relative value of the dollar and yen could reverse.
With the yen falling to 153 per dollar this week, the BoJ is likely to react by selling holdings of US Treasuries, effectively selling the dollar and buying the yen.
When investors start to unwind the carry trade, we’ll see enough selling of US Treasuries to lower the price of US government debt increasing the yield.
That would increase the already massive interest expense being incurred on our behalf by Washington DC and force more dollar printing. The result of that would be more inflation.
We’re happy to see more people starting to recognize this problem with more articles in the press and attention on Twitter/X. If you’d value knowing these kinds of things a year and a half before they’re common knowledge, we invite you to subscribe.
5 Things to Know - Thing 2) The Bank of Japan is Being Forced to Act:
DKI Takeaway: Trillions of dollars have been invested in the “carry trade” which involves selling low-yielding Japanese Government Bonds and buying higher-yielding US Treasuries.
This strategy provided guaranteed profits on the difference in bond yields, but came with the risk that the relative value of the dollar and yen could reverse.
With the yen falling to 153 per dollar this week, the BoJ is likely to react by selling holdings of US Treasuries, effectively selling the dollar and buying the yen.
When investors start to unwind the carry trade, we’ll see enough selling of US Treasuries to lower the price of US government debt increasing the yield.
That would increase the already massive interest expense being incurred on our behalf by Washington DC and force more dollar printing. The result of that would be more inflation.
We’re happy to see more people starting to recognize this problem with more articles in the press and attention on Twitter/X. If you’d value knowing these kinds of things a year and a half before they’re common knowledge, we invite you to subscribe.
- **Europe's IPO Market Not Open to Unprofitable Tech**: According to Bank of America, Europe's initial public offering (IPO) market is not yet open to unprofitable tech companies. This suggests that European investors are still cautious about investing in tech startups that are not yet profitable. [1][4]
- **Fed's Shrinking Balance Sheet Worrying US Financial Markets**: The Federal Reserve's reduction of its balance sheet, known as quantitative tightening (QT), is causing concern in certain corners of the US financial markets. This is because banks are sitting on large unrealized losses in their securities portfolios, and any attempts to sell these securities to raise liquidity will deplete their capital. [2]
- **Potential Halt to Fed's Balance Sheet Runoff**: The decline in balances at the Fed's reverse repo facility could lead the central bank to halt its balance sheet runoff earlier than expected, particularly if the reverse repo facility is completely emptied, which Barclays estimates could happen as early as May or June. [2]
- **Tremors in Dollar Funding Markets**: The unknown point at which the Fed will consider bank reserves "ample" and the recent rally in US Treasuries increase the chance of further volatility in dollar funding markets, especially heading into the end of the year when banks face regulatory balance-sheet constraints. [2]
Sources
[1] Why the yen is so weak and what that means for Japan https://lnkd.in/gK4Sg2W9
[2] The Fed's Shrinking Balance Sheet Is Worrying a Key Corner of US ... https://lnkd.in/gxgjZpS6
[3] [XML] sitemap_news.xml - Bloomberg.comhttps://lnkd.in/gEyAckQ5
[4] Alexandra Muller - Bloomberg.comhttps://lnkd.in/gu2Vnv55
[5] China Vanke in Debt Swap Talks With Banks to Stave Off Default https://lnkd.in/gF7Sufka
📈 Financial Market Update 🌐
Exciting developments in the financial world! 🌍 The yen took a dip and global bond yields followed suit after the Bank of Japan's recent announcement. Here's a quick roundup:
🔍 The yen fell by 1.5% to a one-week low against the dollar, while the Nikkei 225 market index rose as the Bank of Japan maintained its policy rate at -0.10%.
🌐 Global bond yields also saw a decline, with Treasury 10-year yields dropping around two basis points and German 10-year yields falling by five basis points across the eurozone.
📈 In the US, market futures edged higher, with the Nasdaq 100 hitting a new high for the second consecutive session. Crypto stocks, including Coinbase and Marathon, gained ground as Bitcoin surged beyond $43,000.
🇯🇵 Japanese officials have not laid out a framework for moving away from sub-zero interest rates. BoJ Governor Kazuo Ueda resisted predictions of policy tightening as early as January, providing relief to global bond markets.
🗣 "The BoJ stance encouraged speculators to sell the yen, and there's relief that yields in Japan aren't likely to jump higher," said Lee Hardman, a MUFG strategist. "That takes some of the downside risk away for other major global bond markets as well."
🎙 BoJ's Governor Ueda assured, "We won't hesitate to take additional easing measures if necessary." Stay tuned for further market dynamics! 💼📊
#finance#globalmarkets#bankofjapan#yen#bonds#investing#marketupdates#boj#ueda#bojueda
Adjunct Professor - WASEDA University : AOYAMA Gakuin : Private Portfolio Manager - TCAS
2w#4 is flying under the radar but having a serious impact. Why repat the cash … ?