Strength has increased rapidly recently yen The former European Central Bank president said on Tuesday that this could be seen as a healthy adjustment that was overdue and that it was not the time to panic about the broader market effects.
Japan’s monetary policy turned hawkish, geopolitical tensions in the Middle East and disappointing U.S. jobs on Friday and Monday, Jean-Claude Trichet told CNBC’s “Squawk Box Europe” data, these factors combined to disrupt global markets.
“In my opinion, these three played a role in triggering this (USD/JPY) correction, which was, nevertheless, long overdue because everyone knew the yen was in an inappropriate position and the arbitrage Trading has been, I would say very active over a long period of time,” said former Bank of France Governor Jean-Claude Trichet. “
A “correction” is generally defined as a decrease in the value of an asset or index of 10% or more, bringing it closer to the long-term trend.
Arbitrage trades involve investors borrowing currency at low interest rates and reinvesting it in higher-yielding assets elsewhere – exploiting the difference to make financial gains. In recent years, investors have flocked to yen carry trades, attracted by Japan’s low volatility and ultra-loose monetary policy.
USD/JPY
But the yen began to appreciate rapidly last Wednesday, when the Bank of Japan raised its benchmark interest rate and laid out plans to taper its bond-buying program.
The dollar plunged nearly 5% against the yen last week and fell further on Monday, but edged up 0.5% on Tuesday. Meanwhile, global stock markets plummeted as “safe haven” assets such as gold Swiss franc U.S. Treasuries were also supported.
“You can’t unwind the largest carry trade the world has ever seen without breaking some heads,” Kit Juckes, chief currency strategist at Societe Generale, said in a note on Monday.
“In some ways, this adjustment can be seen as a healthy adjustment,” Trichet told CNBC on Tuesday. “Of course, we will see that we have to remain extremely cautious and cautious, but we are very cautious about the adjustment that we observed last time.” There are good explanations.
“This may be overdue, we are seeing a number of positive factors in the U.S., Europe and the global economy that are still there and justify no panic – no panic, in my opinion, This is very, very important.
“I see no reason to panic about the United States,” Trichet added, referring to the U.S. composite purchasing managers’ index for July, which remained in growth territory.
Talk of a U.S. recession erupted last week after a weaker-than-expected July jobs report, although some economists and Fed policy makers dismissed the idea that the data showed a severe economic downturn.
According to CME Group’s FedWatch tool, the market has become convinced that the Fed will cut interest rates at its next meeting in mid-September, and has since increased bets on a 50 basis point rate cut instead of 25 basis points to nearly 75%.
Some are also speculating that the central bank may need to implement emergency rate cuts between scheduled meetings.
However, Trichet said on Tuesday that while the Fed may be “hesitant” between 25 and 50 basis points, current data does not support an emergency rate cut.
“Given everything we know, I think it’s not conceivable that the Fed would give an element of — I wouldn’t say panic, but an element of anxiety. It would be reasonable,” he added. He said more data will provide a clearer picture in the coming weeks.
In another sign of economic strength, Trichet said central banks should be credited with a period of persistently low inflation, although inflation in the United States and the euro zone remains above target.
“The last thing I would say is that in some ways, the unforeseen things that are happening (in the market) can be interpreted as healthy corrections, but I’m still very cautious and cautious,” he said.
— CNBC’s Sam Meredith Lim Hui Jie Contribute to this report
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