Although it is not being reflected in the price of the yen today this reports seems to give more visibility to further rates hikes in Japan. Although I was not out in front of this idea during the spring, that Japan would be starting a rate hiking cycle contributed to the sell off in emerging markets. The idea behind this was that higher rates in Japan kills the carry trade or put another way creates risk aversion selling in emerging markets and higher yielding developed markets.
This chart looks at the New Zealand dollar to the yen and the Hungarian forint to the Czech koruna post the spring correction. NZD and HUF are higher yielding currencies while JPY and CZK are lower yielding.NZDJPY is a popular carry trade and in the last three months you can see the kiwi is up dramatically. This can considered a proxy for risk taking. HUFCZK is not really a cross rate that too many people look at but even with all of the problems in Hungary a risk appetite persists.
If Japan is a proxy for the carry trade and if the rates will go up in Japan we could again see many other markets react negatively. For now I think this is something to know about and follow even if it is not actionable today.
3 comments:
Why such currency focused comments? How about should we over weight or under weight Japan?
I study and read about currencies all the time as part of my process. This web site is about my sharing process. This is part of it.
I think it will take another strong Tankan to get the BoJ into a hiking state of mind. The other economic data points are not exactly earth shatteringly strong. I would argue that the BoJ is worried that if they signal a hike is coming, the Yen will strenghten and hurt their exports, thus putting pressure on the economy. Also, the last time the BoJ decided to hike rates while the Fed was on pause, it turned out to be a disasterous maneuver and sent the Nikkei plunging (along with the US markets). While the environment is different, I am sure the officials at the MOF are reminding the folks at the BoJ of this.
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