A relative game

Take a look at the chart below. It shows most developed economies M2, rebased at the beggining of 2004. As you can see, those economies have printed money like there is no tomorrow. Japan, by a wide margin, has printed the least. If “money supply growth debases a currency” were a clean, standalone rule, the yen should be the strongest G7 currency over this period. USD/JPY just hit 163.79, up 7.4% over the past six months alone, and near 2-year highs. The yen has been one of the weakest major currencies for years, despite the most disciplined M2 profile in the group. Meanwhile the Dollar Index (DXY) is also up over the same 6-month window (+5.5%, to 101.52), even though the US has expanded M2 far more than Japan has. So what’s actually driving these moves if it’s not money supply alone? For the most part, Interest rate differentials. The BOJ has kept rates near zero for decades while the Fed hiked aggressively. That gap, not the stock of money, drives the carry trade, and therefore the currency strength/weakness. Also important is Growth and yield expectations, which pull capital toward higher-yielding currencies regardless of their money supply history. In other words, relative moves matter more than absolute levels; a currency can strengthen against one peer while weakening against another. The takeaway: M2 growth is a real signal worth watching, and eventually will explain a big part of the currency movement, but currency strength is a relative game, not a standalone function of the printing press.

Want to know more? You can register for free at Fund@mental.

#iamfundamental #soyfundamental #wealthmanagement #familyoffice #financialadvisor #financialplanning #policymistake #ratecut #stagflation