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Weekly Market Update

Japanese Yen in Focus

In this week, we cover the yen, drivers of US outperformance, and factors that should influence Fed’s policy stance.

5 min read
Head of North American Investment Strategy & Research

Insight of the Week

Interest rates and momentum are key drivers within currency markets. These factors have both worked against the yen, which has deprecated steadily by 50% against the US dollar over the last three years. Interest rate differentials encourage investors to make carry trades (borrowing a currency with a low interest rate to buy a currency with a higher interest rate). The US Federal Reserve’s higher-for-longer stance has put upward pressure on the USD, while the Bank of Japan’s lower-for-longer has put downward pressure on the yen. Momentum then gains traction in the market – the yen falls because investors are selling, leading to more selling.

The above chart shows that the widening of the US–Japan interest rate differential has been positively correlated with the depreciation of the yen. The widening of interest rates reflects the different growth and inflation environments in the US and Japan. The US has been fighting multi-decade-high inflation, whereas Japan has welcomed some inflation after struggling to get prices and wages to rise after decades of economic stagflation. As a result, the Fed hiked from rock bottom to a target range of 5.25-5.50%, while the BoJ continued to rely on ultra-low interest rates between 0–0.1%.

Going forward, we maintain a negative view of the yen versus the US dollar, given high US interest rates and strong relative growth, along with the dollar’s superior recent performance as a safe-haven asset. Until we see a more definitive turn lower in global yields, the yen is likely to remain weak. Yet, we see further yen weakness as somewhat limited due to the increased potential of currency intervention, something which we have already begun to witness. To learn more about our views on the yen, please read our latest commentary.

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