Let’s talk about the yen for a minute.
If you had to pick one currency pair to serve as a proxy for markets, it would probably be USDJPY.
The yen is gauge of safe-haven flows, it reflects the plight of exporters in a world increasingly driven by FX vol, and it is in many ways a kind of running, real-time referendum on the market’s conviction regarding the Trump administration’s commitment to a weaker dollar.
If you want to know just how sensitive USDJPY is to political developments, just have a look at the following chart from Goldman which depicts 3-month implied vol versus historical precedent:
(Goldman)
Also, recall last night’s Bloomberg tape bomb which found Trump Treasury pick Steven Mnuchin explaining to the senate the perils of an “excessively strong dollar” – the reaction in USDJPY:
With all of that in mind, you might find the following from Deutsche Bank of interest as you navigate the ebb and flow of the reflation trade.
Via Deutsche Bank
Last week, Mr. Trump stated in a Wall Street Journal interview prior to his inauguration that US companies cannot compete with Chinese companies because the dollar is too strong. At this stage, we can only state that the view that this could lead to a stronger yen or the Trump administration wants the dollar to weaken is one of over interpretation.
US Secretary of the Treasury candidate Steven Mnuchin said at his confirmation hearing that a strong dollar is important in the long term and the dollar is currently very, very strong. This is well-balanced in terms of policymakers’ understanding of the currency. Supported by the relative strength of the US economy in the last five years, the dollar index is indeed close to its long-term average of +20%, and is overvalued cyclically.
Even if verbal interventions to cap dollar strength are effective on the first some occasions, we do not think the dollar trend will change as long as the Trump administration talks up policy targeting 4% economic growth and the Fed aims for multiple rate hikes. The USD/JPY could be cyclically further pushed up like in the case of the Reaganomics in the early 1980’s. We see a dip-buying opportunity if the USD/JPY loses ground owing to verbal intervention.
