[Tokyo, 25]- At midnight on October 21st (Japan time), the second foreign currency-selling/buying dollar exchange intervention was implemented. It is believed that the third time was early in the morning on the 24th of the following week, but the Ministry of Finance has taken the stance of what is known as a “hidden intervention” without announcing the implementation of the intervention.
It will be about a month after the first September 22nd. Even with this series of interventions, it will not take long for the currency to return to the previous level of 152 yen to the dollar. This means that the effect of the intervention only lasts for a small number of days.
Investors know this and will see the immediate result of the intervention as a golden opportunity to invest in dollars. Such speculative speculation will further weaken the effect of foreign exchange intervention, which is originally only temporary.
It will be interesting to see when the next series of foreign exchange interventions will take place. The author believes that after the effect of the second and third series of interventions will disappear after a while, the next milestone will be the exchange rate breaking below 152 yen to the dollar and reaching 155 yen.
The timing will be around mid-November, a month later. The release of the US Consumer Price Index (CPI) on November 10 will have a major impact on the prospects for another rate hike at the US Federal Open Market Committee (FOMC) on December 13-14.
When the dollar/yen exchange rate moves towards 155 yen in early to mid-November, the third round of foreign exchange intervention is likely to be implemented to stop that trend.
Forecasting exchange rates is very difficult. Since the rule of thumb of the past does not hold true these days, it takes courage to predict the further depreciation of the yen to 160 yen, 170 yen, and 180 yen, which is unknown, and publish that prediction public. What I feel is that an underestimation bias occurs among experts precisely because it is an unknown field. I think it wouldn’t be strange if it reached 160 yen by the end of the year (is this also too low an estimate?).
One thing that can give us some clues is the link between long term US interest rates and the dollar/yen rate. When Japan’s long-term interest rate is fixed at 0.25%, the interest rate differential is almost equal to the US long-term interest rate.
When calculating the relationship between January and October 2022, the dollar / yen exchange rate will be 149.1 yen if the US interest rate is 4.0%, 152.2 yen if it is 4.2%, and 155 if it is 4.4% If 0.4 yen and 4.6%, it will be 158.5 yen.
The policy rate is expected to rise by 0.75 percentage points each in November and December to reach 4.50-4.75% by the end of the year. I expect US long-term interest rates to rise to around 4.6%.
The US Federal Reserve will continue to tighten monetary policy longer than many believe, in order to bring inflation down to the 2% range. At the FOMC meeting in December, the policy rate forecast will be published. Therefore, the author believes that long-term interest rates will rise as financial market sentiment is renewed.
Now, I would like to think when the depreciation of the Yen will peak. Individual investors who have already invested in the dollar want to sell the dollar at some level and take a profit. However, once the dollar is sold and the Yen depreciates, it becomes tempting to try a dollar investment again. And this time, the Yen will appreciate, and there will be many losses.
For example, a person who took a profit at 135 yen to the dollar must be bitter about the exchange rate being more than 150 yen to the dollar. For individual investors, selling is much more difficult than buying. Once you sell, you need to sell the dollar after swearing in your heart that you will never invest in dollars again.
One way of thinking is to wait for the Yen to depreciate as far as it will go, then mark the peak of the yen’s depreciation, and then sell the dollar after the Yen strengthens a bit. Refrain from starting to aim for the biggest return on a dollar investment and aim for the second best.
For example, at the end of December, the dollar hits 160 yen, and in January, when it turns to a strong yen trend and hits 155 yen, profit is taken. When it goes up to 170 yen, sell the dollar at 165 yen after seeing a reversal.
A good investment guide is Charles Ellis’ book The Loser’s Game. Rather than aiming for a tennis shot, individual investors preach that it is more important to focus on playing “not to lose” in order not to make any mistakes.
According to Ellis, avoiding the “double whammy” of selling the dollar too cheap and then investing in the dollar again is extremely important as an investment strategy for individual investors, rather than predicting where the best level to sell the dollar will be. dollar. out that.
Those who watch the US economy point out that raising interest rates by the Fed will cause a recession. By comparison, investors in US stocks are underestimating the impact of Fed tightening on the economy. I agree that the Fed will not cut rates that easily. I see recession risk as reasonable.
Simply put, the unemployment rate has to be raised in order to reduce the level of wage growth by 5% behind the increase in prices. For rents (including imputed rents) to fall, house prices need to fall further. There will be adjustments that would not be out of place in an economic downturn.
On the other hand, some data suggest that the US economy is very strong. Data from the Commerce Department on corporate earnings showed a growth rate of 22.6% year-on-year in 2021. After that, the year-on-year growth rate in the first quarter of 2022 is 0.1%, and the growth rate in the second quarter is 4.6%.
This is partly due to the fact that corporate earnings are inflated by the effects of inflation. We can see a virtuous circle of inflation – increased profits – higher wages – inflation. So inflation won’t come down that easily. Instead, risks still face the US economy, and a Fed rate hike could keep rates high into 2023.
I would like to return the story to the exchange rate. When downside risks to the US economy increase, the pressure of a weaker dollar and a stronger yen will work. The time to sell the dollar is near.
Conversely, when there is a high possibility that the US economy will perform better, the exchange rate tends to move towards a stronger dollar and a weaker yen. It would be better to wait patiently to see how far the current depreciation of the Yen will go, rather than waiting for the timing to sell the dollar in the near future.
Based on this line of thinking, I think it’s important not to worry about where yen depreciation will peak.
Editing: Kazuhiko Tamaki
(This column was posted on the Reuters Forex Forum. It is written based on the author’s personal opinion.)
* Hideo Kumano is the chief economist of the Dai-ichi Life Research Institute. He joined the Bank of Japan in 1990. He retired in July 2000 after working in the Research and Statistics Office and the Information Services Office. He joined the Dai-ichi Life Research Institute in August of the same year. Incumbent since April 2011.
*Content such as news, trading prices, data and other information in this document is provided by columnists for your personal use only and not for commercial purposes. The content of this document is not intended to solicit or induce investment activity, nor is it appropriate to use the content for the purpose of making a trading or buying or selling decision. This content does not provide any investment, tax, legal, etc. advice that constitutes investment advice, nor does it make any recommendations regarding specific financial stocks, financial investments, or financial products. Use of this document is not a substitute for investment advice from a qualified investment professional. Although Reuters makes reasonable efforts to ensure the reliability of the content, any opinion or opinion provided by a columnist is the opinion of the columnist and not Reuters.
