Expat Currency Corner Archive
The triumph of the Liberal Democratic Party (LDP) and Japanese Prime Minister, Shinzo Abe, over the weekend has driven the Japanese stock market skyward and the exchange rate downward. Whilst the certainty of a freshly mandated national government usually affords a domestic currency with value, the specific brand of PM Abe’s premiership explains the Yen’s downturn.
The problem, as Princeton and Nobel Prize-winning economist and Japan specialist, Paul Krugman, points out is the deflationary pressure and low growth that the Japanese economy has endured for decades. Periods of severe deflation, an extremely concerning and eschewed macroeconomic reality, have gripped the Japanese political economy sporadically throughout the period. The solution that Krugman points to is an increase in the money supply and general stimulus; big time.
The Bank of Japan has this capacity. Either through the rapid acquisition of vast amounts of governmental or private debt, the Bank can increase the money supply, thereby increasing the lending facility of private banks, financing government expenditure, and generally increasing the availability of credit and the circulation of money.
This brand of macroeconomic and political guidance is exactly that endorsed by the successful candidate, Shinzo Abe and the Liberal Democratic Party. Whilst this may ultimately be what Japan needs in the long-run to finally escape its deflationary and recessionary pendulum, it is nevertheless erodes the value of the economy in the medium term.
As many of my articles have explained, loose monetary policy leads to a depreciation of the exchange rate by increasing the supply of money and decreasing the reward for investment. The former lowers the effective price of the domestic currency whilst the latter decreases its attractiveness from outside and within; thereby leading investors and savers to look elsewhere for their currency exposure. Therefore, it is ultimately unsurprising that the confirmation of and lead up to Abe’s success was characterised by consistent gains on the Nikkei, the Japanese stock market, and consistent losses for the Yen.
Shown in the graph below, the devaluation has been sustained yet relatively modest. The long-term prosperity of the Japanese economy, particularly when considered alongside the increase in exporting competitiveness derived from a weaker Yen, may well outweigh the shorter run cost to consumers from more expensive imports.
20th October 2017 – Expat Currency Corner’s Safe Haven Currencies:
The US Dollar is not a safe haven. That may come as a surprise because one could make a strong argument for its stability as the most liquid and heavily traded currency in the world. This characteristic, in fact, is confusingly why it is not a safe haven. The liquidity and stability of the US Dollar in good times is one of the reasons why it is the world’s major conduit for business. Companies and corporations over the world flock to the consistent purchasing power of the Dollar, supported by an immense population underneath it.
This corporate and financial exposure of the US Dollar is why it is not a safe haven. When times are bad, i.e. when global geopolitical risk is mounting and looking unsustainable, it is these institutions that investors and stakeholders wish to minimise their exposure to. Therefore, there is a de facto exodus from the dollar, flooding market supply which, when met by low demand, allows the price of the Dollar to fall.
Despite lacking the status of a safe haven, the US Dollar is unequivocally stable and, unsurprisingly, a popular currency amongst the expatriate community. With the Dollar consolidating considerable value over the past few weeks, many analysts see little reason for this trend to reverse into 2018.
The election is dominating the political economy of Japan at the moment. Before this weekend’s event, most immediate fluctuations in the value of the Japanese Yen are likely, although not certain, to be derived from the leadership contest. However, with crises of industry affecting wider Japanese markets, the supremacy of the election to the Yen cannot be guaranteed.
Critically, also, the Yen is a fully fledged safe haven currency. Therefore, whilst the domestic environment will be reflected in the value of the Yen, the global geopolitical atmosphere has the propensity to make the Japanese currency highly volatile. As a central safe haven asset, alongside the Swiss Franc and Gold, its price is proven to vary inversely with other non-safe haven currencies.
Therefore, whilst the value of the Yen may, at times, be uncertain, it can usually be considered overpriced in globally bad times and under- or fairly priced during good times. The rising tension within the Koran Peninsula creates an interesting new dynamic within Japan and the Yen. Whilst the value of the Yen should rise during times of geopolitical uncertainty and insecurity, its geographical proximity to the epicentre of the troubles makes its relevance as a safe haven against North Korea questionable.
For almost 100 years, the Swiss Franc has acted as a safe haven currency. A politically and socially stable country, Switzerland is also a quintessentially neutral player on the international stage. Known for its strong and entrenched financial system, confidential banking and low inflation rates, it is considered by many to be one of the most stable currencies in the world. Although these are some of the most likely reasons why the Swiss Franc is a safe haven currency, the nature of a safe haven currency means one cannot know for certain.
What we do know is that investors flock to the Swiss Franc when geopolitical or natural challenges arise. Bucking the trend, when all other currencies seem to be shedding value, the Swiss Franc appreciates. The Swiss Franc is essentially a disaster fund, so whilst you may not protect yourself against inflation and loss in good times, you can be confident that the Franc will stay strong.
19th October 2017 – Expat Currency Corner’s US Dollar News:
Due to its long standing reputation as the world’s cornerstone reserve currency, it’s no wonder why many expats choose to invest their money in US Dollars.
Disappointing retail data in the UK is determining the movements of the Pound Sterling this morning. The Office of National Statistics, ONS, revealed not only lower than expected results but also lower results than August, causing the Pound to slip against the US Dollar and the Euro, by 0.3 percent and 0.37 percent respectfully. High inflation and low wage growth result in less disposable income for normal people. This effect is believed to be part of the reason for the decline in retail spending. Samuel Tombs, from Pantheon Macro, similarly claims that the fall in spending was ‘driven by retailers implementing large price rises.’ There has, however, also been some discussion on a natural decline between the end of the summer spending and the beginning of the Christmas period. Analyst Michael Hewson said ‘the last three months have seen positive months for retail sales and with Christmas coming it wouldn’t be too much of a surprise if we were to see a pause in September numbers.’
Following a fractious week in Spain, Madrid has made a move to suspend Catalonian autonomy after regional president, Carles Puigdemont, refused to abandon his bid for an independent republic ahead of the 10 a.m. CET deadline this morning. The Spanish government is set to meet on Saturday to propose enacting Article 155 of the constitution, which would allow Madrid to take control of the region, while stripping it of some of its power, pending approval from the Senate. In a letter to the Prime Minister, the Catalan leader said that although the independence declaration had been suspended, the regional parliament, over which he presides, would vote in favour of independence if Madrid was not willing to talk and continues to repress the region. The Euro fell sharply against the US Dollar immediately following Puigdemont’s failure to comply with the deadline and Rajoy’s statement. This was corrected, however, within the hour, with the Euro trading back at levels closer to those before the announcement. The temporary weakness could be attributed to an overreaction from the market following the news, which was quickly rebuffed.
While Japan’s election has remained headline news, the threat from Pyongyang to ‘sink’ Japan into the sea, while it fired missiles over northern Japanese islands, is fast gaining traction. Polls are still suggesting Prime Minister Shinzo Abe’s Liberal Democratic Party is set to win in the election on Sunday, with the latest numbers suggesting that he should take 300 of the 465 seats. Abe takes an uncompromising position on North Korea, wanting to exert concentrated pressure on the regime. Abe is also looking move away from the self-defence line that Japan currently takes towards their own military and adopt a more offensive position. This proposition has recently faced criticism for being too provocative. Following WWII, Japan has adopted a pacifistic approach to its military strategy, a policy supported by a large proportion of the Japanese electorate.
The Japanese Yen strengthened against the US Dollar, following the release of the Japanese Balance of Trade data today. Japan’s exports rose by 14.1 percent, falling short of the expected rise of 14.9 percent and far less than August’s results of 18.1 percent. Economist Hiroaki Muto, from Tokai Tokyo Research Centre Co, claimed the slowdown was only temporary. He said, ‘data measuring manufacturing activity in overseas economies shows we are in the middle of an expansionary phase. Exports will continue to support Japan’s economy.’ Data from the finance ministry showed that exports were affected by a decline in shipments of cars and electronic parts as well as TVs, audio equipment and ships.
Despite each of these idiosyncrasies, the overall trend of US Dollar strength still prevails. This is unsurprising considering the reputation of the US Dollar being the most stable currency, that facilitates one of the largest markets, in the world.
Amazing food, superb weather and beautiful landscapes; it is no surprise that, last year alone, over 5 million expats made Europe their home.
The last week has seen a captivating jostling of pre-existing underlying trends within Euro currency crosses. Despite staying fairly static, due to a cooling down period since the Catalonian Referendum, the Euro has been manipulated by the Pound Sterling, US Dollar and Japanese Yen.
The recent Brexit talks in Brussels have been described as being in a deadlock. Still stuck at stage one of negotiations, squabbling and semantics are precluding any ‘divorce deal’ progress. Despite a positive joint statement assessing the progress to be ‘constructive and friendly’, some EU leaders believe the approach to negotiations that May’s government has taken is so chaotic that it ‘must be part of a cunning plan’. The lingering cloud over the UK economy set to stay, meanwhile, the Pound will continue to struggle against the Euro.
The US Dollar strengthened against the Euro this week, following the Federal Reserve’s minutes that shifted the market-attributed probability of a December rate hike to 80 percent. Fed officials are said to be worried that “core inflation might not rebound quickly but that isn’t going to stop them from continuing to normalise interest rates, particularly not when the unemployment rate is getting so low,” according to Paul Ashworth of Capital Economics.
Surprisingly, following favourable opinion polls, Prime Minister Shinzo Abe has set a date for Japan’s snap election. Despite Theresa May proving last June that no contested democratic result can ever be guaranteed, Abe’s win has been increasingly priced into the market, further endowing the Yen with a value of certainty. Abe has proven his commitment to new and overdue market policies, making the value of a Liberal Democratic win even greater.