The Yen defense

A rare move has occurred in currency markets: the U.S. just stepped in to defend the yen. It’s even more rare if we consider the context: No natural disaster, war, or recession/depression is happening in Japan, and yet, on Friday, the Federal Reserve Bank of New York, acting on behalf of the Treasury, sold euros to buy yen. It’s the first time Washington has intervened directly to support the yen since 2011, and reportedly the first time it’s used euro sales to do it in over two decades. Why now? The yen had slid to near 40-year lows against the dollar, at one point trading above ¥163. Japan had already intervened on its own Thursday, reportedly selling close to $59B to prop up its currency. Friday’s coordinated action, Tokyo and Washington moving together, is a meaningful escalation. Why this matters: (1) A weak yen has been fueling the “carry trade”, borrowing cheap yen to fund purchases of higher-yielding assets elsewhere, which itself adds pressure to the currency. It’s estimated that the gross notional position in Yen carry trade is about $1.5Tn. with total yen-related FX swaps and forwards hitting ¥2,281 trillion (~$15T), though that figure includes far more than just carry-trade activity. In other words, it’s massive. (2) Coordinated G7-style intervention of this kind is genuinely rare; the last comparable episode was in 2011 after the Japan earthquake/tsunami. (3) It signals how seriously U.S. and Japanese officials are treating yen weakness and its knock-on effects on inflation and import costs in Japan. This is not the last episode of this currency war. Bit it is a warning to speculators that there is a much bigger balance sheet involved in the defense of the Yen, simply because there is too much at stake.

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

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