- DM and Asian EM FX have corrected, on average, by 10-12% against the USD, since 2022.
- Most striking is the yen’s 41% correction in two and a half years.
- There are some economic considerations for the Japanese authorities to push for a stronger yen.
- But we don’t think they are compelling enough to push them toward vigorous intervention.
- US policymakers, convinced of USD’s overvaluation, may push for action. Expect volatility.
Related Insights
Commentary: FX storm brewing
Without much rise in volatility, global currencies have undergone large movements in recent years. Sharp monetary policy tightening in the US in 2022/23, followed by what is increasingly evident to be a prolonged hold, has boosted the US dollar against just about all key currencies. We estimate that both DM and Asian EM currencies have corrected, on average, by 10-12% against the USD, since the beginning of 2022. There was a brief period of a rally by DM currencies against the USD in late 2023, but that has gotten reversed in recent months with curve steepening in the US and the entrenchment of the higher-for-longer narrative.
No currency underscores the pressure stemming from US rate increases than the Japanese yen. In just two and a half years, the yen has depreciated by 41% against the USD, with the Bank of Japan still grappling with monetary policy normalisation.
The BoJ has some reasons to worry about keeping rates so low. Deflation is no longer an issue; in fact, inflation has pushed real wage growth to negative territory. The government’s popularity has been hit by cost of living concerns, among other negative developments. We however don’t think these matters are sufficient to push the government of Japan toward interest rate increases on an expedited manner or undertake vigorous FX intervention. We don’t think the authorities are troubled by the prevailing positive growth/inflation mix.
If there is going to be a tipping point with exchange rates, it would be geopolitics related, in our view. The April 17 Japan-Korea-US ministerial statement, released in Washington DC, explicitly referred to the weakness of the won and yen a concern. Our reading of US treasury officials is that they view the USD to be over-valued against a wide range of currencies, including the Chinese yuan.
There is potential impact on the RMB that could transpire with sustained trade/tech salvos from the US. China’s fledgling economy could buckle under new trade and tech restriction measures, compounded by the ongoing weakness of competitor currencies like the won and yen. A period of RMB weakness could ensue, which in turn could lead to even further measures from the US in a proverbial currency war.
Threats of tariffs or other trade restriction measures are likely to be the impetus for currency intervention in the period ahead, much more so than economic motivations, in our view. Global FX movements have been large lately, but not volatile; it won’t take much for the latter to surface.
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