US Dollar Appreciates A Yen For Easy Money

Typical global economic recoveries are characterized by a weak US Dollar and a sudden increase in consumption by the worlds biggest importer, triggering commodity inflation. As the record US stimulus began in 2020 to replace the Covid suppression of economic activity, the Dollar weakened and commodity inflation accelerated throughout as expected. As our hyper stimulated economic expansion created inflation in 2021, the US allowed interest rates to rise. However, our major trading partners continued to keep their long bond yields near the zero bound. This triggered capital flows to the US, away from Japan and Europe, as investors sought the higher yielding return of US assets. This also boosted an out performance of US stocks over the rest of the world. In 2022 there has been a well telegraphed shift to tighter monetary policy in the US and Europe that has precipitated a sharp rise in interest rates. Meanwhile, the Bank of Japan (BOJ) has surprisingly ignored soaring inflation and vowed to maintain a weak Yen policy of Buying their Bonds. They will also continue the controversial long-term policy of buying $100 Billion of their stock market annually. Japanese Prime Minister Kishida continues to defend the BOJ’s cheap currency policy to combat a growing trade deficit and support an economic recovery. Ironically, the BOJ desires the inflationary effect of a weaker Yen to increase exports and offset Japan’s heavy reliance on imported raw materials inflation. In other words, inflation and the Yen take a back seat until their export machine is back in high gear.

One of the most percipient BOJ gurus, Mr. Yen (Eisuke Sakakibara), the former minister of Finance, avers that higher yields will not stop the Yen from depreciating further and that the BOJ’s Kuroda will support the Yen near 130 to the dollar (Forex) or about 0.007700 (Globex). The Yen is extremely oversold on a price momentum basis and is currently testing 20 year lows, so rallies along with seasonal patterns allow for short term rallies. However, we expect rallies to be limited in the months ahead, until copper and petroleum sustain significant declines or the Yen falls to 7700 on Globex. 

The BOJ’s Kuroda acknowledges that the falling Yen is hurting domestic consumption and housing, but he can’t be fired and appears determined to maintain quantitative easing (QE) to infinity or as much as required to keep 10 Year Bond yields at or below 0.25%. This is a full 1% (100 basis points) beneath equivalent Euro Bonds and over 2% under the US. This rapidly widening spread illustrates a major factor in the weaker Yen as Japanese investors send their currency abroad for a better return on capital. Russia’s war on Ukraine and inflationary sanctions that should create a scarcity of energy, metals and food, remain a major wild card. Despite Putin’s quisquous reputation, peace progress can sharply depress commodity inflation or a tortuous war escalation could greatly exacerbate the current 40 year inflation levels. For the foreseeable future, expect significant BOJ bond buying stimulus to occur any time the 0.25% yield level is tested. This policy will continue to be supportive of the US Dollar, especially with the growing consensus of a series of double rate hikes by the US Fed in the months ahead.

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