On August 2, 2024, in Tokyo, a man walked past an electronic quotation board showing the exchange rate of the Japanese yen against the US dollar.
Kazuhiro Nogi | AFP | Getty Images
The main driver of global markets is the yen exchange rate, according to a financial historian, who warns that the trend should attract the attention of those who are “entirely focused on domestic developments in the United States and trying to assess the price consequences.”
Russell Napier, co-founder of the investment research portal ERIC, said in his recently released “Solid Foundation” macro strategy report that investors have understood the impact that changes in Japan’s monetary policy may have on U.S. finance. .
“Having such a close relationship between the monetary policy structure of China and Japan and U.S. asset prices will have a huge impact on most U.S. investors,” Napier said in a note released on Tuesday.
“The narrative over the past few decades has been that from an economic and financial perspective, the United States was largely an island immune to such global trends.”
Stocks tumbled broadly, with many market participants caught off guard by the speed of the yen’s rise.
The yen has gained about 8% against the dollar last month, trading at $148.84 on Friday. That was in stark contrast to the eve of the July 4 U.S. holiday, when the yen fell to $161.96 for the first time since December 1986.
On July 31, 2024, the Japanese flag was raised at the Bank of Japan (BoJ) headquarters in Tokyo.
Kazuhiro Nogi | AFP | Getty Images
Rising yen boosts guess On whether this marks the end of the popular so-called “carry trade”, in which investors borrow money in currencies with low interest rates, such as the yen, and reinvest the proceeds in currencies with higher returns.
“U.S. stocks are now clearly vulnerable to a rising yen, warning of the consequences of changes in monetary policy in the East for both U.S. and developed world asset prices,” Napier said in a note on Tuesday.
He cited the recent rise in the yen as an example, as selling pressure from investors seeking to repay yen debt has driven down prices on U.S. stocks while yields on U.S. government debt continue to fall.
“For U.S. stocks to react so negatively to the yen’s rise is a sign of the future and an indicator of how investors understand the interrelationship between U.S. stock market valuations and the global monetary system,” Napier said.
“The Collapse of the Carry Trade”
The Dow Jones Industrial Average fell nearly 500 points, or 1.2%, on Thursday, the S&P 500 fell 1.4%, and the Nasdaq fell 2.3%.
Cedric Chehab, global head of country risk at research firm BMI, said on Friday that a number of factors were at play over the past 10 days or so. However, he insisted “such adjustments are absolutely normal” at this time of year.
“First, the hawkish Bank of Japan caused the carry trade to collapse in the short term. U.S. manufacturing data and some employment sub-indicators also spooked the market,” Chehab told CNBC’s “On the Street.”
“Then overnight we saw a lot of volatility in some of the key earnings. All of that helped push what was already a pretty expensive stock market even lower,” he continued.
Chehab said one factor some investors seem to forget is that stock market volatility typically rises seasonally between July and October.
“Early Warning Indicators”
Separately, Napier said the recent downturn in U.S. stocks could have a significant impact on yen carry trade investors.
“The negative reaction in U.S. equities will be exacerbated by financial repression, as carry trade investors will be forced to sell, while Japanese financial institutions will be forced to sell and buy (Japanese government bonds) at the direction of Japanese authorities,” Napier said.
“With the yen so undervalued and Japan’s looming financial repression, investors should not expect U.S. equity valuations to continue rising when this change comes.”
Napier concluded that the behavior of the yen in recent weeks and the impact on U.S. stocks “provide some early warning indicators that when foreign investors enter a period of capital repatriation, the United States will struggle to maintain an unsustainable situation.” Home bias may It will last more than ten years.
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