The exchange rate plummeted sharply, and Japan and South Korea urgently took action to "rescue the market".
On December 20th Beijing time, Japanese Finance Minister Katsuyuki Kato stated that the yen has recently experienced one-way and severe fluctuations, and appropriate actions will be taken to address the excessive volatility of the yen. Junichi Sanmura, the head of Japan's monetary policy, stated that appropriate measures will be taken to prevent excessive foreign exchange fluctuations. On that day, the US dollar rose to a five month high of 157.93 against the Japanese yen.
At the same time, the South Korean exchange rate market also experienced a wave of selling, with the Korean won continuing to decline. On December 20th, the exchange rate of the US dollar against the Korean won rose to a high of 1452.1. The Korean won has fallen by more than 12% since the beginning of the year and is expected to have its worst annual performance since 2008. Faced with the continuous decline of the South Korean won exchange rate, South Korean pension funds may heavily sell US dollars.
Compared to Japan and South Korea, Brazil's exchange rate has faced a more severe depreciation storm, with the cumulative increase of the US dollar against the real exceeding 20% this year. The Brazilian central bank has been continuously selling US dollars to curb the depreciation trend of the Brazilian real exchange rate.
Currently, the biggest variable in the global exchange rate market remains the Federal Reserve. The Federal Reserve's hawkish interest rate cuts this week have dealt a heavy blow to market expectations of rate cuts, and some options traders have even turned their attention to the possibility of the Fed starting a rate hike cycle at some point next year.
Take action to 'rescue the market'
The hawkish stance of the Federal Reserve is causing a major storm in the global exchange rate market.
On December 20th Beijing time, Japanese Finance Minister Katsuyuki Kato stated that stable exchange rate trends are crucial in reflecting fundamentals. Recently, the Japanese yen has experienced a one-way and drastic fluctuation; Take appropriate action against the excessive volatility of the Japanese yen.
During a speech in Tokyo, Japan's monetary policy chief Jun Sanmura also stated that appropriate measures will be taken to prevent excessive foreign exchange fluctuations.
In recent times, the Japanese yen exchange rate has continued to decline. On December 20th, the US dollar rose to a five month high of 157.93 against the Japanese yen. After statements from Katsuyuki Kato and Jun Mimura, the Japanese yen rebounded and is now at 156.89.
The main reason for the sharp decline in the Japanese yen is that the Bank of Japan announced on the 19th that it would keep the benchmark interest rate unchanged at 0.25%.
The Bank of Japan reiterated that the inflation trend seems to be consistent with its target for the second half of the outlook period, indicating that the economy is moving towards its expected direction, which is a prerequisite for interest rate hikes.
The South Korean exchange rate market has also experienced a wave of selling, with the Korean won continuing to decline. On December 20th, the US dollar rose to a high of 1452.1 against the Korean won. The Korean won has fallen by more than 12% since the beginning of the year, making it one of the worst performing Asian currencies this year and expected to hit its worst annual performance since 2008.
Faced with the continuous decline of the South Korean won exchange rate, South Korean pension funds may heavily sell US dollars. Insiders told the media that if the average closing exchange rate of the Korean won exceeds about 1450 won for five consecutive trading days, the National Pension Service (NPS), which manages South Korean pensions, will activate a strategic hedging mechanism. Once activated, strategic currency hedging will continue unless there is a significant drop in exchange rates.
1450 Korean won to 1 US dollar has triggered the internal hedging mechanism set by the National Pension Corporation. If the exchange rate reaches a significant deviation from the long-term average level of over 20 years, the National Pension Corporation has an obligation to hedge 10% of its foreign exchange assets.
According to the official website of the National Pension Corporation, as of the end of September this year, its total foreign exchange assets were 485.5 billion US dollars.
Analysts say that as the largest participant in the South Korean foreign exchange market, if the National Pension Corporation stops purchasing foreign exchange and sells US dollars, it is expected that the pressure on the depreciation of the Korean won will weaken. In addition, to alleviate exchange rate pressure, the Financial Services Commission of South Korea requires local banks to flexibly manage foreign exchange transactions and loans.
The Korean won is one of the weakest performing currencies in Asia this year, due to political uncertainty surrounding the impeachment of South Korean President Yoon Suk yeol and the impact of the appreciation of the US dollar. The Korean won is one of the biggest "victims" of the political turmoil in South Korea, and its sharp decline has raised concerns in the market about the credit value of South Korea.
Compared to Japan and South Korea, Brazil's currency depreciation storm is more severe. On December 19th local time, the Brazilian central bank sold $8 billion in foreign exchange reserves to curb the depreciation of the Brazilian real exchange rate. This is the fifth dollar sell-off activity carried out by the Brazilian central bank since last week.
The day before, the closing price of the US dollar against the real hit a historic high of 6.2896, with a cumulative increase of over 20% for the year. After the intervention of the Brazilian central bank, the depreciation trend of the real has eased to 6.1541.
Gabriel Gal í polo, the new governor of the Brazilian central bank who will take office next year, stated in his latest speech that he does not believe the real is being affected by speculation. The depreciation of the Brazilian real is a natural reaction of the market to the current economic situation in Brazil.
The 'anchor of global asset pricing' surges wildly
Currently, the biggest variable in the global exchange rate market remains the Federal Reserve.
The Federal Reserve's hawkish interest rate cuts have dealt a heavy blow to market expectations of rate cuts, directly pushing up the US dollar exchange rate and intensifying the depreciation pressure on currencies such as the Japanese yen and Korean won.
After the Federal Reserve's decision ended, some option traders even turned their attention to the possibility of the Fed starting a rate hike cycle at some point next year.
The trend of the options market related to the Guaranteed Overnight Financing Rate (SOFR) reflects market expectations that monetary policy will sharply shift towards a hawkish trend by the end of 2025, although Federal Reserve Chairman Powell stated at this week's press conference that raising interest rates next year is an "unlikely outcome".
Reflecting on the market level, the 10-year US treasury bond bond yield, known as the "anchor of global asset pricing", rarely staged "nine consecutive rises", which led to the yield spread of US two-year and 10-year treasury bond hitting a new high since June 2022.
Ian Lyngen, head of US interest rate strategy in BMO capital market, said that the weakness of long-term treasury bond was due to the hawkish attitude of the Federal Reserve and the pressure of treasury bond expansion. The trend of steepening curve still has a long way to go before the end of 2024.
Most bond investors are highly concerned about whether US President elect Trump's tax reform policies can boost the economy and push up inflation, and the budget deficit may worsen further.
The latest article by Nick Timiraos, a reporter from The Wall Street Journal and a member of the New Federal Reserve News Agency, suggests that if officials conclude that the neutral interest rate has risen, the Federal Reserve may stop cutting interest rates for a considerable period of time.
It is worth noting that with the annual rotation of voting members in the Federal Open Market Committee (FOMC), the addition of new members may increase resistance to further interest rate cuts to some extent.
TD Securities analyst Oscar Munoz said that this opens the door to more "rate cut opposition votes" next year. Because the members who are about to gain voting rights are more hawkish.