Kevin Warsh wasn’t the only person relieved by Friday’s lackluster BLS jobs report.
Japanese finance minister Satsuki Katayama and the hedgie who runs the US Treasury were likely a measure of grateful too.
The demonstrable miss on the headline US payrolls print for July (and accompanying downward revisions to hiring in May and June) served to undercut the dollar as Fed hike expectations receded and the Treasury curve bull steepened.
That, in turn, bolstered the yen, which was flagging anew as the impact of last week’s joint intervention waned.
The simple figure above gives you a sense of things. USDJPY was 0.6% lower late Friday. Even including sessions where officials intervened, that counted among the 10 best days for the yen in four months.
Not to put too fine a point on it (and at the considerable risk of stating the obvious), this is what the yen needs — a fundamental reason to firm, not gimmicks like those Scott Bessent resorted to last week in and around Treasury’s euro-selling.
It took about six weeks for dollar-yen to retrace following Tokyo’s go-it-alone intervention on April 30, when Katayama engineered a 2.4% one-day rally for the yen. The low for USDJPY was 155 or so on May 6. By June 9, it was back to 160. And why not? The fundamentals hadn’t changed.
Although Bessent’s assist certainly added some oomph to Japan’s latest effort to undo “disorderly yen movements,” even aggressive, coordinated intervention can’t ultimately hold the line if the fundamentals don’t change.
As the figure shows, USDJPY was already retracing from the Monday lows headed into Friday’s US jobs report. In the absence of a change in the relative fundamentals, Katayama and Bessent will likely be forced into additional interventions.
You can’t address a structural issue by threatening to inflict large losses on speculators. It doesn’t matter if your threats are credible, because “speculators” aren’t the problem in the first place. To the extent they exist (and the FX market certainly doesn’t hurt for speculators), they’re just a scapegoat here.
This is why I didn’t accord the intervention story much attention last week. It’s a charade. The yen’s a low-yielder, and despite having narrowed by well more than half from the October 2023 wides, the US-Japan 10-year yield gap’s still ~185bps. Until the facts on the ground change, there’s no reason to expect sustained yen appreciation.
Sanae Takaichi’s not helping. Her government’s in the process off adding something like $32 billion to Japan’s fiscal shortfall with a two-step plan to eliminate an 8% consumption tax on food. At no point has Takaichi demonstrated much in the way of concern about the bad budget optics.
Unless the fundamentals shift and/or Bessent can rope in a “coalition of the willing” (to borrow an Iraq Warism) among G10 nations to bolster the yen, successive interventions to stop USDJPY from breaching whatever this month’s red line is will be for naught.
Of course, Bessent knows this space. He’s a macro trader, after all. Scoff as you will, but I take some limited solace in that. He has decades of experience managing risk. But normalizing ESF mobilization seems like a slippery slope to me, and as it turns out, Bessent didn’t speak to Christine Lagarde until the day after he tapped Treasury’s euro assets to buy yen. That’s a bad look, and it apparently pissed off some ECB officials, likely including Lagarde herself.
As discussed at some length here, the debate around FIMA Repo’s a red herring. Japan doesn’t lack access to dollars. Tokyo doesn’t need Warsh to expand the limit on that facility in order to avert selling Treasurys to raise dollars for interventions.
The issue, rather, is that the yen’s weighed down by a highly compelling structural bear case. That’ll either change or it won’t. If it does, the currency can stabilize. If it doesn’t, it can’t.
With that in mind, Bessent almost surely extracted promises from Japan in exchange for Treasury’s help last week, probably including an accelerated timetable for a BoJ rate hike, which I imagine’s now very likely for September. Thanks to Friday’s lackluster US payrolls report, a Fed hike next month’s highly unlikely, which means the fundamentals shifted markedly in favor of the yen late this week.
Coming full circle, if 164 was indeed the top for USDJPY, it’ll be because the fundamentals changed, not because Bessent scared off the speculators.
“You can’t address a structural issue by threatening to inflict large losses on speculators”
Sadly, I must differ with you on this, unless you care to label the carry traders as thoughtful investors or something. Japan is not totally dependent on foreigners buying their debt as are many of their neighbors. Thanks to MMT. So why shouldn’t they try to put the whip to them?
Over the last thirty years a weak yen has gone from being a desired outcome to a major negative.
Bessent is taking a big risk here. The major risk to Bessent and the global financial system may not be that the Japanese sell US treasuries. In recent months carry traders have been a growing source of demand for US treasuries. (Nice long-term holders, right?) It may well be that if the carry traders are indeed sent scuttling away, that source of buying would reverse as margin calls kicked in. From a political perspective, that’s a horrible outcome for the White House.
When John Taylor posted here, he disparaged Bessent’s hedge fund record. We’ll see if Bessent is up to the task. I’d be a lot more comfortable if Jaime Diamon or any number of my classmates or colleagues (and opponents) the hedge and prop trading world were in his seat.
What’s to “differ” with? The carry trade itself is structural, so yeah, those are “thoughtful” investors. They’re not day-trading Bitcoin or binary options on whether Taylor Swift’s next album will stream enough to beat Drake. They’re borrowing cheap money to invest in other money that offers a higher yield. It’s more or less speculative in direct proportion to how much leverage you employ, which in turn determines how sensitive your trade is to FX vol.
Everybody who’s paying attention engages in carry trades any chance they get. If you get a credit card offer in the mail with a 21-month 0% APR teaser rate, a $500 sign-up bonus after you spend $XYZ, 3% cash back for the first 18 months and cash back matching for 12 of those 18 months, and you don’t take that offer, you’re derelict. It’s free money. You use the interest-free loan to buy necessities you’d otherwise pay cash for, invest the cash @ 3.5% for 21 months, then pocket your $500 and your cash back. As long as you don’t go over ~30% of the card’s total limit, your credit score will probably go up for your trouble, because your overall borrowing power’s higher. That’s not “speculating,” it’s just a carry trade. Life’s full of them.
Of course, carry + leverage does = speculation. But Bessent’s not that damn stupid, surely. He’s not going to generate so much yen appreciation that he blows up everybody’s models and triggers a forced unwind of all the foreign fixed income (and it’s not just Treasurys) on the other side of those trades.
Besides, the implication from the MoF and Bessent is that Tokyo and Washington aren’t fighting the carry trade, as such, per se, etc. Rather, they’re fighting “disorderly” yen movements, an allusion to apocryphal hordes of nefarious gamblers trying to piggyback on the trend to the detriment of the public good. To the extent that’s true, blowing those people up isn’t going to fix anything, because the fundamentals still argue in favor of using the yen as a funder. I think the real story here’s that Trump and Bessent just wanted something they can hang over Japan’s head when they want/need something from Tokyo. That’s the kind of “leverage” Trump likes.
Also, we saw this movie exactly two years ago. Literally to the day / week. I wrote God only knows how many scary-sounding articles in August of 2024 about all the sundry apocalypse scenarios associated with the end of the market’s longest-running structural trade — i.e., the yen carry trade. And then… what? Nothing. It all fizzled out and everybody stopped talking about it, which is what happens with 9/10 (99/100?) of these “the game has well and truly changed” narratives. I should know: I’ve been penning those narratives for a dozen years now. My guess is that by Christmas, this won’t even be a story anymore.
That would suit me personally.
I’ve been too lazy to look up what markets Bessent was active in. I’d be slightly more confident if he came from the macro fund world. Rather than merger arbitrage or private property investing.
As is the case for refreshing what percentage of Japanese government debt is domestically funded. The last number is recall was 90% thanks to MMT. Thanks to circular funding that would make those trying to fund datacenter construction green with envy.
Your wearing em, Sucker!
As to Secretary Bessent’s hedge fund experience, when he left his own macro hedge fund and returned to working for Soros, he did have some experience in the FX market: ” Bessent returned to SFM as chief investment officer from 2011 to 2015.[26] His bet against the Japanese yen in 2013 yielded more than $1.2 billion in profit in three months.[31]” So similar to me. his career appears to have been built on good looks and charm rather than top-top performance in the markets.
As to the percentage of Japanese government debt funded by domestic sources, my ancient memory was still correct: “Japan is not primarily in debt to foreign countries or outside lenders. About 88% to 90% of Japan’s national debt is owed to domestic Japanese institutions and its own citizens, meaning the government largely owes the money to itself.” That makes it a tougher target for specs who claim that the Yen will weaken until the government makes huge structural reforms. However, they do have a short-term lever because a weaker yen is now a political liability. Just like most voters outside the US, Japanese voters do not appreciate higher food and energy prices.
What did Scottie have written on his pad – Sell $5-10 billion JPY?
That’s chump change in the FX market!
Even 30-40 years ago.
Anybody still out there who had to trade/market make back in 1985 when the JPY was 245ish?
Now that was intervention!
Gerard here and a few others remember when a few central banks were nasty to reckon with. The MAS (Monetary Authority of Singapore) comes to mind.
But I was most impressed by SAMA (the Saudi Arabya Monetary Authority). In the mid 80s my speculative colleagues, mostly in London, were piling into positions assuming that the Saudis would have to devalue their currency, the Rial, by changing the peg. In that kind of system, it resulted in short-term interest rates getting driven up. Like Overnight borrowing rates of 200% as specs scrambled to fund their short positions. For some reason SAMA was not pleased by this.
Back then the Saudi FX market was open over weekends, though trading liquidity was very very scarce. So one weekend, SAMA did change the peg …. by revaluing it higher. Mayhem ensued. A few days later once many of the the leveraged specs were chased out, they reversed course and devalued the currency.
Now that was one damn poweful central bank.