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فاریکس تجزیہ اور جائزے: USD, JPY, EUR: facts that you could have omitted in your forecasts
time 08.09.2022 12:34 PM
time Relevance up to, 22.09.2022 12:10 PM

The fundamental difference among currencies is getting more striking even to a person outside the world of exchange trading. In the recent past, major currencies stood out from less traded currencies. Nowadays, the situation is as follows: the US dollar alone is flexing its muscles across the board.

USD, JPY, EUR: facts that you could have omitted in your forecasts

The fundamental difference among currencies is getting more striking even to a person outside the world of exchanges. In the recent past, major currencies stood out from less traded currencies.

The fundamental difference among currencies is getting more striking even to a person outside the world of exchanges. In the recent past, major currencies stood out from less traded currencies. Nowadays, the situation is as follows: the US dollar alone is flexing its muscles across the board.

To grasp the point about the US dollar's strength, let's take its index and compare it with its own 200-day moving average. You certainly apply this method to your trade forecasts. You can also do something else and compare charts of the US dollar with some major currencies, for example, the euro and the yen.

Looking back, it is obvious that the US dollar has been at more elevated levels in the last 20 years. It happened in 2015 when the currency market adjusted to the epic collapse in oil prices a year earlier. Both traders and authorities of all countries are well aware of the greenback's reign.

The US currency has reached the highest levels since 1998 against the currencies of the two largest exporters in Asia, Japan and South Korea. Their national currencies were weak to the same degree after the financial crisis in Asia after which Russia defaulted on its debt.

Notably, the South Korean won is still a bit stronger than at the time of its apocalyptic depreciation in 1997. For the time being, it is trading at about the weakest levels since the global financial crisis of 2008.

The situation on Forex mirrors not only economic problems in developed countries but advantageous market conditions for the US dollar. It is especially evident through the prism of Japan's economy.

According to the laws of the economic science, central banks should respond to this imbalance. However, analysts are baffled by the way central banks actually respond. So, analysts are trying to puzzle out the reasons of such measures from governments.

Yen

Technically, the yen is approaching the time when the Bank of Japan can take the decision to intervene, but the crisis has not been overcome. Last time when the Bank of Japan intervened on Forex with the aim of reinforcing the national currency, the yen was roughly at the same levels it is bidding now. It is a psychologically crucial point. In fact, the market is testing the determination of the Bank of Japan to push ahead with its ultra-dovish monetary policy as well as to maintain the yields curve. Interventions would be needed to maintain the yields of 10-year Treasuries at low levels. Importantly, other central banks are tightening their polices.

If the Bank of Japan ventured into forex interventions, this would negate all efforts to reinforce the yen and might bring unexpected results.

Last time the yen plummeted because local banks were eager to recover from the burst Japanese bubble in 1980. Besides, the brewing Asian financial crisis assured the Bank of Japan to maintain the dovish monetary policy.

At that time, the US dollar found solid support from the traditionally hawkish Federal Reserve that maintained the federal funds rate at the elevated level of 5.50% to combat inflation.

The Bank of Japan intervened on behalf of the Finance Ministry and sold US dollars aiming to protect the yen. Alas, the intervention was not a success because markets evaluated right the catastrophic economic conditions. The US dollar went on with its rally and reached as high as 147-148 versus the yen, thus erasing all forex reserves of Japan. The greenback topped out and reversed only when Russia announced a default of its government bonds. The shock forced hedge funds to regain their losses in Russia, scaling down their profitable short positions on the yen which set the stage for the US dollar's slump. By the year end, the greenback traded at 115 against the yen.

In 2022, the yen is facing the risk of tumbling to its lows of 1998 again, i.e. to 147-148 against the US dollar unless some shock forces the Federal Reserve or the Bank of Japan to revise their stance. Alternatively, we don't know something important and Kuroda is having a scheme how to make the yen a new world's reserve currency.

Apparently, it is too late for the Bank of Japan to do single-time interventions.

Back in 1998, even a direct interference didn't bring any fruit. The key to the action was the global economic structure shaped by currency market makers and consumers.

Personally, I support the second scenario. Kuroda witnessed how the crisis of 1998 unfolded. He is well aware that the intervention will not bring much unless monetary policy remains dovish. At the same time, the US Fed is committed to rising interest rates. Thus, I have a premonition that the Bank of Japan is poised to sit the storm out.

The fresh GDP report for Q2 2022 encourages the Bank of Japan to stick to its policy. Exports expanded a whopping 3.5% in annual terms, 0.6% higher than the most optimistic forecasts. Exports increased 0.9% sequentially, 0.2% higher than flash estimates. Importantly, not only foreign demand went up. Japan reveals modest growth in domestic consumption. These are excellent metrics amid the global economic crisis. At the same time, Kuroda has clearly rejected purchases of foreign government bonds. It means that he is focused on domestic production and exports.

What about market sentiment? Nothing will prevent speculators from pushing the yen even lower and reinforcing the US dollar in the process. It is accompanied by the huge inflow of foreign investments in Japanese stocks which is 150 points higher than expected. As a result, Japan could take good advantage of this process. Benefitting from low credits from the government that supports the dovish rhetoric, the Japanese will buy the most of stocks of Japanese companies which now belong to foreign investors. This way the Japanese will regain control over the real economy.

Bearing this in mind, I admit that Kuroda's policy is a great example of how to take advantage of the crisis satiation. Let's wait and see whether the Bank of Japan's Governor will be faithful to the dovish rhetoric.

Euro

The euro is the headache of European traders. The single currency has recently slumped tbelow the parity level with the US dollar.

The ECB is holding a policy meeting today. Now everyone understands that the differential in real yields between the US and the EU is bolstering the US dollar's rally. The correlation between growing inequality in favor of the US and its currency is catching the eye on any chart.

In the case with Europe, it would be wrong to explain it by the eternal currency standoff among different central banks.

Apparently, the crisis in Europe is aggravated by the conflict between Russia and Ukraine. This conflict makes a different impact on energy prices on both sides of the Atlantic.

The energy shock is unfolding in a different manner than in previous cases. The crisis is putting a greater strain on European than on the US because the former allies translated their standoff on the energy market.

Chart: USD and oil prices irrelevant

USD and oil dependence ended a year ago

This image is no longer relevant

Commonly, the US dollar is in the opposite correlation with oil prices. Indeed, all transactions with oil are nominated in US dollars. The oil collapse following the breach of discipline by OPEC in 2014 is accompanied by the US dollar's advance. This time, the US dollar strengthened despite growing oil prices. The change in market relations has been incredible in the recent 12 months. In other words, the US dollar is following its own trajectory irrelevant to the energy market. In fact, the greenback's dynamic is no more related to natural gas and crude.

Allan Raskin from Deutsche Bank AG pointed out that changes in EUR/USD have been caused not by central banks but price shocks in the energy market that crippled the economic performance in Europe. Indeed, the downturn in the Eurozone was so serious that he suggested the euro was keeping at the parity level but not dipping below it as we see on daily charts. The expert notes that energy jitters escalated the risks of the current account deficit in euros because the eurozone's current account is shifting from a large proficit towards a deficit. At the same time, real yields are sharply going down. Thus, the euro is firmly holding at the parity level.

Gas storage in Europe has been filled in advance this time. The EU will certainly survive this winter all right unless a severe winter breaks out.

The ECB is aware of such important factors for the EU economy and takes into account would-be consequences. The ECB takes into account the bitter experience of rejecting energy futures contracts a year ago. Consumer inflation has accelerated highs unseen since the introduction of the euro in 1999. To sum up, the euro is going through the nightmare. If the euro meets the challenge, it will strengthen for sure.

Nevertheless, there is a meaningful detail.

Unlike the Federal Reserve, the ECB is authorized to struggle with inflation without taking care of employment growth. In fact, the ECB doesn't attach importance to the labor market this year, though this criterion is the key in the dual mandate on both regulators. It means that the next ECB's move will be hawkish for sure.

The question is whether we should expect a rate hike by 50 basis points with the hawkish rhetoric or 75 basis points with more neutral rhetoric depending on further economic data. I guess both scenarios are possible.

The ECB took into account the positive factor of easing consumer inflation last month and unexpectedly negative developments in gas supplies from Russia which have shaken the whole world. Such conditions assure the ECB to stick to the hawkish rhetoric.

In my opinion, the positive factor is that Russia has apparently exhausted its economic leverage by cutting its gas supplies. The recent GDP upward revision of Q2 2022 in the EU gives some hope. If you look at recent economic data, you hope for improvement in the EU, excluding Germany. Therefore, I reckon the ECB policy meeting will not trigger extreme volatility, even though the regulator will come up with hawkish rhetoric.

The bottom line is that the ECB is considered a victim of the brewing energy crisis. The Eurozone wants to cut energy consumption by 15%. This measure guarantees modest economic growth. The ECB can do nothing about this.

If energy prices continue their advance (by the way, it is possible in any instability not related to Russia, for example, by the conflict in OPEC), this rally will make a similar impact as a grave financial shock like tax increases. This will undermine the euro's forex rate, even though the ECB will make everything possible to contract the gap between bond yields in Europe and the US. Oil prices have been falling in recent days due to pessimism about global energy demand. The news of a COVID lockdown in another province in China increases risks for global economic growth. Russia will hardly wash its hands off the matter with further destructive actions in all hostile countries.

Lower oil prices are beneficial for the US where petrol prices are politically crucial. Gasoline prices in the US have retreated to their levels before the war in Ukraine. Cheap oil is not a serious argument for the Eurozone and Germany in particular. A fierce challenge on the back of scant gas supplies overshadows the question of oil prices. The ECB is focused on its struggle against inflation. Oddly, this issue does not matter a lot for the time being because of the strong US dollar and the serious battle for gas supplies.

I reckon that the euro's forex rate is of secondary importance for ECB policymakers. They set a goal to protect the economy. Thus, they are more vulnerable than their American counterparts. At the same time, the overvalued US dollar is throwing punches on American exporters while demand for European goods is growing. The question is open who will win the battle after the crisis and conflicts are over.

Egor Danilov,
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