Can the Yen be some kind of exception in the FX world history?

About the Yen:  We are not alone in wondering if the MoF has intervention in mind. Two cabinet secretaries tried verbal intervention overnight and both were ignored.

Yesterday Bloomberg plus the FT and others had screaming headlines about the yen crashing to its weakest in x number of years. Bloomberg has 40 years and the FT had 15. See the monthly chart. It’s of no use whatever in figuring out what comes next in any standard analysis.

Can the yen be some kind of exception in the FX world history? Yes, maybe. It lost a generation to deflation and ennui. Its demographics are horrendous—rising old folks, few babies, no immigration.

Enter politics. Trump hates the dollar so strong and sent TreasSec Bessent to Japan to make a deal about weakening it, including intervention. It hasn’t worked. It’s not that the trading world is rebellious—it’s not. It’s downright cowardly. But it’s also up against stubborn, hidebound institutions that refuse to adapt and change. Meanwhile, Japan gets the benefit for exporters and tourism.

A favorite truism in Japan is “it’s the nail sticking up that gets the hammer.” This is not going to end well.

Outlook

Today we get the May JOLTS report and June​consumer confidence.

The important news is not US jobs, German inflation, or Chinese PMI, but what Mr. Warsh says tomorrow in Sintra. A sizeable minority think he is about to pivot to a dovish stance now that the ships are passing through the Strait.

This would be a replay of the Covid “temporary inflation” mistake the Fed made a few years ago. The immediate supply chain may be getting repaired, but as every energy economist points out, it’s going to take months and years for condition to return to the pre-war state of affairs—and prices. 

Assuming Warsh signals a hawkish stance, the dollar can recover and pdq. Another factor is the rising uncertainty over Iran claiming the right to control the Strait and to charge a toll, with or without Oman. Rising uncertainty favors the safe-haven.

Forecast

We think the US will give in to Iran controlling the Strait and imposing a toll. To distract from this colossal failure, Trump needs a distraction, and a big one. He cares about his place in history over the midterms or anything else. He wants to be the epitome of US power and that means a grand gesture.

We do think he will go for Cuba. We also think he will go for Greenland. But the biggest grand gesture would be a deal with China, as Nixon did.  If globalization is a dead duck, it needs to be replaced with alliances that exclude others, like those ungrateful Europeans.

Maybe the US joins the Belt and Road initiative, although that seems weak. How about some kind of AI deal? China wants the yuan to become a numeraire for trades. That has not been going all that well (because the dollar is just so much easier, not to mention freer). But the US could add yuan to its reserves. Mr. Bessent has probably been tasked with finding some pathway to a humungous, world-changing US-China deal.

It won’t be easy because China is smart and won’t be played. US concessions will have to be very big and long-lasting. Then there’s China’s weird relationship with Russia, the other giant Commie country. Maybe the US commits to re-directing oil to China if China gives up Russian oil.

A new US-China deal could become a straw that breaks the camel’s back—meaning the dollar’s top place in world currencies. Trump wants a weaker dollar. This could give it to him.

In the meanwhile, while the White House is scheming for the next big distraction, the dollar is following the yield downward—for the moment. But we must expect paring of positions going to the long holiday weekend and that suggests a revival of the dollar.

Don’t forget the evil demon lurking in the corner—a new tech-mania meltdown.

Food: Trump does not own America. His belief that he owns it is his delusion. It’s OUR country, not his.