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In the foreign exchange market, the yen is appreciating rapidly. On July 18, the yen rose to its highest level against the dollar in a month. Trump is considered to have an advantage in the US presidential election in November, and he has shown a positive attitude to change the strong dollar. However, there are also views that Trump’s policies will lead to a stronger dollar. Yen carry trade is more suitable for stable market conditions, and now the increase in uncertainty has led to greater exchange rate fluctuations, blowing in headwinds.
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“The dollar’s strengthening trend is finally showing signs of pausing. The market is entering a transition period,” said a foreign exchange broker at a large Japanese bank regarding the appreciation of the yen in recent days.
On July 18, the exchange rate of the yen against the dollar rose to 155.3 yen per dollar in the Tokyo foreign exchange market. This is the highest level since early June. On the morning of July 17, the exchange rate was still between 158.5 and 158.9 yen per dollar, which means that the yen appreciated by more than 3 yen in one day.
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Judging from the content of Trump’s interview released on the 16th, he called for a change in the trend of a stronger dollar to revitalize the domestic manufacturing industry in the United States, and specifically criticized the weakening of the yen.
The main buyers of the yen are speculative institutions that dominate the yen carry trade. They borrow low-interest currency yen and invest in high-interest currency such as the US dollar.
According to the U.S. Commodity Futures Trading Commission (CFTC), as of July 9, the net short position of the yen by non-commercial sectors (speculative institutions) such as hedge funds increased to 182,000 contracts, reaching a historical high. “The increase in short positions in the yen has led to a reduction in the appreciation of the yen,” said Hiroshi Suzuki, chief foreign exchange strategist at Sumitomo Mitsui Bank.
Yen carry trading is considered unsuitable in unstable market conditions. The reason is that if the yen unexpectedly appreciates, the exchange rate loss will cause the interest rate differential to vanish. If the market is expected to fluctuate drastically, speculative institutions will often cancel yen carry in order to lock in profits or cut losses.
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| Trump attends the Republican National Convention (July 17, Kyodo, Wisconsin, USA) |
It is not clear whether the potential impact of the US presidential election and policies will strengthen or weaken the dollar. However, if exchange rate volatility increases and the dollar weakens, it will prompt more people to cancel yen arbitrage, which will cause the yen to strengthen.
In the currency options market, which predicts future exchange rates, the expected volatility (two-period) of the yen-dollar exchange rate has reached about 11%, the highest level since May. Akira Moroga, chief market strategist at Aozora Bank, believes that the exchange rate is expected to fluctuate further and “speculators are still cautiously waiting for the opportunity to unwind the yen carry trade.”
The Swiss franc exchange rate against the U.S. dollar also rose to around 0.88 Swiss francs per dollar on July 18, reaching its highest level in four months. The increase compared to last weekend was outstanding among major currencies. The sharp rise of the Swiss franc, which is as popular as the yen as a funding currency, can also be inferred from the return of carry trade.
Currently, the focus is on the upcoming US presidential election in November. When Trump won the presidential election in the fall of 2016, the yen-dollar exchange rate rose from around 105 yen to around 118 yen per dollar in about a month. At that time, Trump also advocated changing the situation of dollar appreciation, but the market responded to his policy guidelines such as tax cuts to stimulate the economy.
Since 2017, the global economy and stock markets have performed strongly, risk appetite has increased, and the dollar has continued to depreciate. In 2018, the United States took a tough stance on trade policy with China, which led to the appreciation of the safe-haven dollar. From 2019 to 2020, the interest rate cut policy of the Federal Reserve (FRB) and the monetary easing policy adopted in response to the COVID-19 pandemic led to the continued appreciation of the dollar.
What will happen if Trump is re-elected this time? Although there are many predictions that massive tax cuts and increased tariffs on China will trigger a resurgence of inflation and rising interest rates, leading to an appreciation of the dollar, opinions vary.
“If Trump favours a weaker dollar, the pressure on the dollar to appreciate may not be as great, but the dollar may still strengthen as the policy itself may fuel inflation,” said Hiroshi Suzuki of Sumitomo Mitsui Banking Corporation.
In 2016, the expected volatility (two cycles) rose to around 19%. In 2024, Yoshitaka Suda, a cross-asset strategist at Nomura Securities, also said: “As volatility increases, it may become more difficult for speculators to initiate yen selling.”
However, Trump’s victory was unexpected. Resona Holdings senior strategist Keiichi Iguchi believes that “now that the market has predicted Trump’s election, the pressure for the dollar to appreciate may not be as great as in the last election.” The weakening of expectations for dollar appreciation will intensify the expansion of yen carry trades again, and we need to be vigilant about the possible unexpected appreciation of the yen.
Nikkei (Chinese version: Nikkei Chinese website) Tamura Shunhisa, Iida Aoi
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