Markets could unravel if dollar falls below ¥107
Japan is the catalyst that could bring the record-setting bull market for stocks across
the globe to a screeching halt: surprise monetary tightening in Japan could be the
trigger that finally upend what has been an protracted and unrelenting global rally
for assets considered risky.
the globe to a screeching halt: surprise monetary tightening in Japan could be the
trigger that finally upend what has been an protracted and unrelenting global rally
for assets considered risky.
'This could be far more important than the Fed. A lot of major trends start with Japan.
People don't focus on Japan enough
People don't focus on Japan enough
While most investors are busy eyeing rate increases in the U.S. and tapering by the
European Central Bank in the eurozone, Edwards says they should also watch
developments in the world's third-largest economy, Japan, where corporate
profits are surging and inflation has picked up.
European Central Bank in the eurozone, Edwards says they should also watch
developments in the world's third-largest economy, Japan, where corporate
profits are surging and inflation has picked up.
"We've been looking for surprises and one thing that can catch us out is if the
Bank of Japan starts tightening. If it actually follows the Fed and the ECB and
announces some sort of tapering," he said, speaking at SocGen's annual strategy
conference in London on Tuesday.
Bank of Japan starts tightening. If it actually follows the Fed and the ECB and
announces some sort of tapering," he said, speaking at SocGen's annual strategy
conference in London on Tuesday.
"This could be far more important than the Fed. A lot of major trends start with
Japan. People don't focus on Japan enough in my view," he added.
Japan. People don't focus on Japan enough in my view," he added.
Investors already on Tuesday got a taste of how BOJ tightening can rattle the markets.
The central bank said it would buy less of its long-dated bonds, sparking speculation
Gov. Haruhiko Kuroda could back away from its ultraloose monetary policy as early
as this year.
The central bank said it would buy less of its long-dated bonds, sparking speculation
Gov. Haruhiko Kuroda could back away from its ultraloose monetary policy as early
as this year.
The surprise announcement sent global bond markets into spin on Tuesday.
The yield on 10-year U.S. Treasury notes TMUBMUSD10Y, +0.91% jumped above 2.5%
to its highest since March and the 30-year bond yieldTMUBMUSD30Y, +0.08% logged
its biggest one-day jump since Dec. 19.
The yield on 10-year U.S. Treasury notes TMUBMUSD10Y, +0.91% jumped above 2.5%
to its highest since March and the 30-year bond yieldTMUBMUSD30Y, +0.08% logged
its biggest one-day jump since Dec. 19.
Some strategists, however, argue that the recent news was more a technical than philosophical
shift by the central bank. The BOJ has for years been among the most accommodative central
banks in the world and as recent as December reaffirmed its commitment to aggressive qualitative
and quantitative-easing program, also known as QQE. With inflation stubbornly running below
the BOJ's 2% annual target, the central bank has since early 2016 kept interest rates in negative
territory and even introduced a 0%-target for its 10-year government bond yields to avoid deflation.
shift by the central bank. The BOJ has for years been among the most accommodative central
banks in the world and as recent as December reaffirmed its commitment to aggressive qualitative
and quantitative-easing program, also known as QQE. With inflation stubbornly running below
the BOJ's 2% annual target, the central bank has since early 2016 kept interest rates in negative
territory and even introduced a 0%-target for its 10-year government bond yields to avoid deflation.
The determined efforts by the BOJ to boost consumer prices have turned investors against the
yen USDJPY, +0.37% with data from the Commodity Futures Trading Commission showing an
extreme bearishness toward the Japanese currency. However, downbeat investors on the yen
could be caught flat-footed if inflation starts to pick up, prompting the BOJ to halt easing efforts,
Edwards warned. Core inflation in the country has bottomed, as the following chart illustrates,
while more than 60% of households now expect inflation rather than deflation, he pointed out.
yen USDJPY, +0.37% with data from the Commodity Futures Trading Commission showing an
extreme bearishness toward the Japanese currency. However, downbeat investors on the yen
could be caught flat-footed if inflation starts to pick up, prompting the BOJ to halt easing efforts,
Edwards warned. Core inflation in the country has bottomed, as the following chart illustrates,
while more than 60% of households now expect inflation rather than deflation, he pointed out.
"What happens if the BOJ tightens instead of weakens as everyone is positioned for? What if
the yen strengthens and [the dollar] breaks through ¥107? That would be a major surprise,"
Edwards said. "If you are looking for something as a trigger for the great unwind,
this could be it." The yen USDJPY, +0.37% already started to soar this week. The dollar
traded around ¥111.82 on Wednesday, compared with above ¥113 at the beginning
of the week. The last time the dollar traded below ¥107 was in November 2016.
the yen strengthens and [the dollar] breaks through ¥107? That would be a major surprise,"
Edwards said. "If you are looking for something as a trigger for the great unwind,
this could be it." The yen USDJPY, +0.37% already started to soar this week. The dollar
traded around ¥111.82 on Wednesday, compared with above ¥113 at the beginning
of the week. The last time the dollar traded below ¥107 was in November 2016.
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