Trouble in the land of the rising sun

Author

Maric Brauers
May 04, 2024

Trouble in the land of the rising sun

This week in Maric's Weekly:

Table of Contents

The week started with a lot of volatility for the Yen. Looking at the Yen charts you might mistake it for some cryptocurrency, but no. This is a G7 currency we're talking about.

The Japanese currency swung from a 169.25 EUR/JPY on Friday close, down to 171.5 in the early European trading hours. After which, it jumped all the way back to 166.75. Around early north-American hours, the currency stabilized around the 166.75-167.15 mark.
This move came after the BOJ meeting and as it released its forecast for economic activity for the financial year 2024 and 2025 on Friday. Which you can read here.

It seems that since the BOJ meeting, the Ministry of Finance has intervened in the FX markets and that their actions have caused the volatility in the Yen. To what extent they intervened? "No comment, for now." Said a spokesperson for the Ministry.
More info on this in article 1 and 2 of this newsletter. I will also dive deeper on this event and what follows in my monthly newsletter. You can sign up for that here.

The Fed

The Federal Reserve had its rate decision this week and did what basically everyone was expecting. It held rates steady. Fuelling the bets on later rate cuts than expected, none this year or, as some would fear, a rate hike. Although the latest jobs report threw, again, some mud into the water.

Shipping

With most Asian goods now travelling via the Cape of Good Hope, expect shipping costs to keep climbing as shipping companies are trying to adapt to this new global trade environment. With more shipping lanes scheduled in late 2024/early 2025 from south-Asia to the US, these shipping costs should trend lower in the medium/long-term. But for now, it looks like Europe and Africa still have a long battle ahead with the inflationary pressure on, mainly, imported goods. Which both of these continents heavily rely on.

Maric  

The yen swung in holiday-thinned market conditions, punching through 160 per dollar to its weakest in 34 years before rebounding strongly and raising speculation authorities may have intervened.

The Japanese currency dropped as much as 1.2% to 160.17 per dollar on Monday before heading into the other direction to rally more than 2%. The moves, which took place amid thin liquidity due to a local public holiday, may also be signs of nervous traders juggling the prospects of official intervention with the risks of hawkish comments by the Federal Reserve later this week.

Japan’s top currency official Masato Kanda said he had “no comment for now,” when asked by reporters whether or not he intervened in the currency market.

“The market is very jumpy and with not a lot of liquidity, the yen becomes a sharp toy to play with,” said Rodrigo Catril, a strategist at National Australia Bank. “The risk of intervention is an added factor.”

Some in the market put the sharp moves down to the thin trading conditions, with Shoki Omori, chief desk strategist at Mizuho Securities Co. suggesting algorithm-driven accounts may have been partly responsible. But others saw the hand of officials at work.

“The move has all the hallmarks of an actual BOJ intervention and what better time to do it,” said Tony Sycamore, market analyst at IG Australia in Sydney. A Japanese public holiday “means lower liquidity in dollar-yen and more bang for the BOJ’s buck.”

Fed Risk

The US central bank is scheduled to hold a policy meeting during which it may signal the need to keep interest rates elevated amid sticky inflation — a move that would likely support the dollar and undermine the appeal of yen assets. But behind the fundamentals which point to a weaker yen is the risk that Japan steps in to support the currency, as it did in 2022.

“Should there be no intervention, it would be dangerous to catch a falling knife, particularly with the Fed likely to signal a longer wait for cuts,” said Fiona Lim, senior strategist at Malayan Banking Bhd. “Momentum is definitely there for dollar-yen to move decisively above the 160 and markets are testing Japan’s tolerance for a sharp yen decline.”

The Bank of Japan last week indicated financial conditions will remain easy, though policymakers have repeatedly warned that depreciation won’t be tolerated if it goes too far too fast. Earlier this month, the nation’s finance minister also flagged concerns over the yen’s decline to US Treasury Secretary Janet Yellen, which market participants saw as laying the groundwork for intervention.

Japan’s Kanda has given an example of a 10-yen move over one month as a rapid one. Japan’s currency has weakened by about 8 yen per dollar over the last month, but it fell over 2% last week alone and is down more than 10% year-to-date.

One reason for Japan’s seeming reluctance to act may be that intervention alone cannot alter the wide gulf in interest rates that’s in part driving the yen’s decline. While the BOJ has brought local rates out of negative territory, they are still far from levels that would tempt investors from the higher yields on offer in the US and other countries.

“The current pace of depreciation is less than in 2022 so the intervention response could be less intense,” wrote Vincent Chung, associate portfolio manager at T. Rowe Price. “Additionally, market participants have priced in the possibility of intervention by authorities following the BoJ meeting in May, as indicated by option pricing.”

Yen Watchers Ask When Japan Will Step In as Slide Accelerates

Bets in the options market helped to exacerbate the yen’s drop on Monday, with barriers against the dollar and euro being targeted on the view intervention risks were likely low during a Japan holiday, according to Asia-based traders. Against the euro, the yen has fallen beyond 170 to the weakest since the creation of the common currency.

“Pressures will remain on the currency until we get more downbeat growth and inflation data in the US and clearer hawkish shift at the BOJ,” said Homin Lee, senior macro strategist at Lombard Odier in Singapore. “We still think we are quite close to the Finance Ministry’s intervention, in light of the recent rhetoric on excessive currency market moves.”

Japan likely conducted its second currency intervention this week, current account figures from the central bank suggest, in another sign of the government’s intensified battle to prop up the yen.

Tokyo’s latest entry into the market was likely around ¥3.5 trillion ($22.5 billion), based on a comparison of Bank of Japan accounts and money broker forecasts.

The BOJ reported Thursday that its current account will probably fall ¥4.36 trillion due to fiscal factors on the next business day of Tuesday. That compares with the ¥833 billion average forecast by money brokers of what the number would be without intervention.

The figures, released less than a day after the yen jumped sharply during US trading hours, indicate that Japanese authorities made the unusual move of stepping into the market shortly after a Federal Reserve meeting when investors were still digesting the announcement. That would signal the finance ministry is taking an increasingly aggressive stance in what could become a prolonged fight to support the yen.

“With Japanese holidays and US jobs data coming up, it was a very good time for the authorities to tackle speculators,” said Yuya Kikkawa, an economist at Meiji Yasuda Research Institute. “This will have a great impact on the market. I sense a strong determination by the authorities to defend the 160-yen-per-dollar line.”

Japan’s top currency official Masato Kanda declined Thursday to comment on whether the finance ministry had intervened two hours earlier in Tokyo, when the yen strengthened sharply against the dollar. Japan’s currency briefly touched 153.04 from around the 157.50 mark.

Kanda oversaw the previous cycle of interventions in 2022. The ministry bought the yen around 30 minutes after the BOJ’s governor press conference ended in September that year. Another round of moves came a month later with back-to-back business day interventions.

  • Chinese telecom maker is sole funder of optics competition

  • Blacklisted company’s role kept private by DC-based group

Huawei Technologies Co., the Chinese telecommunications giant blacklisted by the US, is secretly funding cutting-edge research at American universities including Harvard through an independent Washington-based foundation.

Huawei is the sole funder of a research competition that has awarded millions of dollars since its inception in 2022 and attracted hundreds of proposals from scientists around the world, including those at top US universities that have banned their researchers from working with the company, according to documents and people familiar with the matter.

The competition is administered by the Optica Foundation, an arm of the nonprofit professional society Optica, whose members’ research on light underpins technologies such as communications, biomedical diagnostics and lasers.

The findings reveal one strategy Shenzhen, China-based Huawei is using to remain at the forefront of funding international research despite a web of US restrictions imposed over the past several years in response to concerns that its technology could be used by Beijing as a spy tool.

Applicants and university officials contacted by Bloomberg as well as one of the competition’s judges said they hadn’t known of Huawei’s role in funding the program until they were asked by a reporter. A cross-section of applicants interviewed by Bloomberg said they believed the money came from the foundation and not a foreign entity.

SAO PAULO/RIO DE JANEIRO, April 29 (Reuters) - Vale (VALE3.SA), BHP (BHP.AX) and their joint venture Samarco have presented Brazilian authorities with a settlement proposal related to reparations for the 2015 Mariana tailings dam burst, but local prosecutors still want them to bump up their offer.

The proposal, the Brazilian mining giant said in a securities filing on Monday, foresees a total payment of 127 billion reais ($24.88 billion), including 37 billion reais already disbursed.

The dam collapse at the Samarco iron ore mine near the town of Mariana in Brazil's southeastern state of Minas Gerais caused a vast flow of mud and mining waste that buried a nearby village, killing 19 people and leaving hundreds homeless. The November 2015 disaster also polluted a major river. Of the remaining amount the companies proposed to disburse, 72 billion reais would be paid to the federal and local governments over a period, Vale said. Some 18 billion reais would be used to settle future obligations.

But the top prosecutor of Minas Gerais state still hopes for a bigger deal, he told Reuters in an interview. "I'm not satisfied with the final amount," Jarbas Soares Junior said. "But with the companies' stance of seeking something more compatible, yes." Soares Junior said prosecutors will try to push the firms to raise their offer to 137 billion reais. "They're asking for a 20-year term for everything, so adding another 500 million reais per year would be no sacrifice for them," he said, referring to the amount still to be paid by the firms.

Maric's notes:

BHP is in the middle of one of the biggest M&A stories in the mining sector in recent years.

Uruguayan unions and social organizations gathered enough signatures Saturday to hold a constitutional reform vote that could lead to the abolishment of private retirement savings in the South American country.

If approved by voters via plebiscite in October, the measure would enshrine in the constitution a minimum retirement age of 60, give the state a monopoly over the social security system, and force pension funds to transfer more than 917 billion pesos ($24 billion) managed on behalf of 1.6 million people to a state-run trust, among other changes.

“Today we are going to deliver 430,000 signatures to the vice president of the republic in congress, so congress can send these signatures to the electoral court,” PIT-CNT union confederation chairman Marcelo Abdala told reporters in Montevideo. That number will probably grow because signatures are still being gathered, he said.

The electoral court now has to vet the 430,000 signatures. If it confirms the number of valid signatures meets the legal threshold of 10% of the country’s 2.7 million registered voters, the referendum will be held simultaneously with presidential and congressional elections October 27.

Supports say the reform measure will create a fairer social security system and put an end to the high commissions charged by private pension funds. Critics warn it would unhinge the stable economy and lead to crippling tax hikes, casting the measure as the type of populist measure seen in criss-prone Argentina in recent decades.

Uruguay has largely sidestepped growing hostility in the region toward private retirement savings thanks to a deep social welfare state that still pays most pensions. President Luis Lacalle Pou even managed to win approval last year for an unpopular pension reform law that gradually raises the retirement age to 65 from 60. In contrast, Chile and Peru allowed savers to withdraw tens of billions of dollars from their retirement accounts, while Argentina expropriated pension savings in 2008.

Now if the measure’s backers have their way, the public-private retirement system that has backstopped Uruguay’s $83 billion economy since its inception in 1995 will cease to exist.

The issue is set to color general elections that pit Lacalle Pou’s ruling center-right coalition against the left-wing Broad Front party that governed the country from 2005 to 2020. Lacalle Pou is barred from seeking a second consecutive five-year term.

Foreign investors are more concerned about the retirement reform vote than the presidential elections, given disruptive events like Brexit in recent years, said Felipe Herran, head of sales and trading at brokerage Puente who visited fund managers in Boston and New York earlier this month.

“The probability of it happening is very low but with a very big impact on markets if it’s approved,” he said in an interview. “It surprised us that people outside Uruguay are following this issue so closely.”

The full costs of transitioning back to a 100% state-run retirement system wouldn’t be felt for years. But the new government that takes office in March would already face fiscal stress from higher pension outlays, said Hernan Bonilla, chairman of local think tank CED.

“The reputational damage to Uruguay as a country with stable and clear rules would be very big,” he said.

  • Move expands earlier restriction on exports to Israel

  • Trade between the two countries was worth $6.8 billion in 2023

Turkey confirmed it would halt all trade with Israel until the country allows uninterrupted and sufficient flow of humanitarian aid to Gaza, after two officials familiar with the matter said the pause went into effect earlier Thursday.

Turkey decided to expand last month’s restriction on some Turkish exports to Israel due to the “worsening humanitarian tragedy in Palestine,” the Trade Ministry said in a statement, adding that work was underway to make sure that Palestinians were not adversely affected.

The move adds to already high-running tensions between the once-close allies over the war in Gaza as President Recep Tayyip Erdogan steps up criticism of the Jewish state and tries to consolidate support among conservative voters at home.

“The second phase of the measures taken at the state level has been started, and export and import transactions related to Israel have been suspended to cover all products,” according to the statement. “Turkey will firmly and decisively implement these new measures until the government of Israel allows an uninterrupted and sufficient flow of humanitarian aid to Gaza.”

Trade between the countries was worth $6.8 billion in 2023, of which 76% was Turkish exports, according to the Turkish Statistical Institute. Israel’s imports from Turkey totaled $4.6 billion in 2023 making it Israel’s sixth largest source for imports, according to Israel’s Central Statistics Bureau. The main imports from Turkey were steel, machinery, minerals and fuels as well as fresh produce and food products.

Media

Non-competes. Employees hate them, employers love them. Or do they?

In Louis Rossmann's opinion: No.

He gives a quick overview of his thoughts as a business owner on the ban of non-competes by the FTC in this video.

You can subscribe to Louis's YouTube channel here.

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