The world is entering a moment of massive earthquakes!
Recently, the global market has actually been revolving around Japan. This morning, Bank of Japan's reviewing committee member Naoki Tamura stated that the Bank of Japan must slowly but steadily normalize its ultra loose monetary policy. The sudden sharp drop in the Japanese yen triggered a surge in the US dollar, leading to the withdrawal of foreign investment and a weakening of the Asia Pacific stock market, with only the Japanese stock market strengthening.
On Monday of this week, the highest official in Japan's foreign exchange affairs issued a warning of speculative behavior in the foreign exchange market, stating that the authorities are ready to take action if necessary. Afterwards, the US dollar index plummeted, the Chinese yuan surged nearly 500 points, and the Japanese yen also rose significantly. The equity market is also taking a breather.
It can be said that the current trend of the Japanese yen is influencing the global currency market and indirectly affecting the flow of global capital and the short-term sentiment of the equity market. So, how much impact will this have?
Japan's swing
This morning, the global currency market experienced another major shock. The source of this massive earthquake was the Bank of Japan. Bank of Japan's reviewing committee member Naoki Tamura stated on Wednesday that the Bank of Japan must slowly but steadily normalize its ultra loose monetary policy. He said in his speech, "In my opinion, the ultimate goal of the central bank is to restore interest rates to a level where demand can be adjusted and inflation can be affected through interest rate hikes and cuts."
He stated that although the Bank of Japan has comprehensively adjusted its monetary policy framework, the side effects of long-term easing policies will still exist, as short-term interest rates remain near zero and long-term interest rates have not yet been fully driven by market forces. "How to manage future monetary policy is crucial for ensuring a clever exit from large-scale stimulus plans and a slow and steady move towards policy normalization." Naoki Tamura, one of the hawkish members of the Bank of Japan, voted in favor of last week's decision to end negative interest rates.
After his speech, the US dollar index surged significantly. The Japanese yen plummeted, and non US currencies weakened globally.
A strong US dollar is also unfavorable for the performance of the equity market. After the above remarks were made, the South Korean stock market weakened and the Hong Kong stock market experienced an increase in decline. The Hang Seng Technology Index fell by 2%, Baidu Group fell by over 5%, and NIO fell by nearly 5%. The Hang Seng Index fell 1.33%. At the same time, the A-share market has also weakened. The net sales of foreign investment once exceeded 8 billion yuan. The commodity futures market also saw a decline in various varieties. The ability of a strong US dollar to absorb liquidity is evident.
In addition, it has been reported that nearly $3 billion in US/date options are about to expire, which has caused anxiety among traders. Japan's highest currency official, Shinzo Kanda, issued the strongest intervention threat in months on Monday, with the yen hovering near a 34 year low, close to the level triggered by intervention in 2022. This is worrying news for US/date option traders who have already sold their strike price of 150.5 and nominal $2.85 billion due on March 28th. If they need to hedge their positions, they will hope that the volatility is as small as possible, and the comments from the Ministry of Finance may overturn this. Ruchir Sharma, Global Head of Foreign Exchange Options Trading at Nomura International, said, "Option sellers will suffer losses due to significant fluctuations because the premium they earn is not enough to cover the cost of hedging against spot fluctuations." The yen has already caused losses to traders multiple times this year. Many hedge funds began buying options in 2024, and if the US/Japan fell, the options would appreciate. However, in the three weeks at the beginning of the year, the currency rose by as much as 5.5%.
In fact, the Japanese government is also a wavering attitude towards the trend of the yen. On Monday of this week, the highest official in Japan's foreign exchange affairs issued a warning of speculative behavior in the foreign exchange market, stating that the authorities are ready to take action if necessary. Japanese Deputy Minister of Finance for International Affairs, Makoto Kanda, told reporters on Monday that the current depreciation of the yen is not in line with fundamentals and is clearly driven by speculative behavior. "We will take appropriate action against excessive exchange rate fluctuations, without ruling out any options." With Shinzo Kanda's statement, the Japanese yen strengthened against the US dollar, marking the first time since February that he has issued a verbal warning to the yen.
Recently, there is another noteworthy signal that funds are also starting to withdraw from the Indian stock and bond markets. The net sell-off of Indian bonds by global investors has reached its highest level in over 12 months. According to data from the Securities and Exchange Commission of India, global funds sold a net of $425.3 million in bonds on March 22, the largest since March 29, 2023. According to exchange data, global funds sold a net of $464.5 million in Indian stocks on March 22, the highest since February 8.
How significant is the impact?
From the current situation, the foreign exchange market is becoming an extremely important variable. Donghai Securities believes that for the bond market, the loose space of domestic monetary policy under exchange rate constraints may converge, short-term interest rates may continue to fluctuate, and the downward momentum is relatively limited. For the equity market, after a smooth upward trend in the early stages, it may gradually enter a consolidation phase.
In March, the Bank of Japan decided to raise the short-term policy rate by 10bp to 0-0.1%, bidding farewell to the era of negative interest rates since 2016. However, the Japanese yen saw a significant decline in both trading days after the interest rate decision, with the US dollar/yen exchange rate briefly hovering at 151. Raising interest rates in the Japanese yen does not necessarily mean its appreciation. Looking back at the two rounds of yen rate hikes in 2000 and 2006, the overall trend of the yen was downward. The main reason is that the cycle of Japanese yen interest rate hikes often starts during the period of higher US bond rates. The low interest rate of Japanese yen and the positive interest margin of more than 300bp of US Japan 10Y treasury bond bonds are still in place, and the carry trade is still continuing. The Japanese yen stabilized after releasing dovish signals at the Federal Reserve's March interest rate meeting, indicating that the US dollar has more weight in the direction of non US currencies.
In fact, the key is the trend of the US dollar index. The depreciation of the Japanese yen is a booster. However, there is more than just one booster. On March 21st, the Swiss central bank SNB lowered its benchmark interest rate by 25bp to 1.5%, marking the first time in Europe, America and other countries to initiate a rate cutting cycle. The market expects that the probability of the Bank of England starting interest rate cuts before June is also over 50%. As an important component of the US dollar index, the pressure on the euro and pound indirectly supports the US dollar. If a strong US dollar continues to exist, it will be difficult for US bond yields to significantly decline, and it will also be difficult for the commodity market to form a bull market. The valuation of the equity market will also be suppressed. This has already been reflected in the recent market.