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The Dollar/Yen went over 163 for the first time since July 1986

About the Yen: The dollar/yen went over 163 for the first time since July 1986. See the quarterly chart. FinMin Katayama said Japan will take decisive action in the currency market if needed, and Chief Cabinet Secretary Kihara said the government is ready to "respond as appropriate at any time."

Many observers think this jawboning means we need to expect intervention at any time now, but as we wrote before, it would be a waste of money and we see 165 as perfectly possible. For one thing, the BoJ is independent and it would take government meddling in interest rates to narrow the differential.

The current overnight rate is 1%, up from zero in June and that is a 31-year high in its own right. Reuters repeats its June poll had another hike to 1.25% by year-end. This is still far, far below the other G7 rates and their yields. We may get that additional hike a little sooner if rising energy costs raise inflation, but that would narrow the differential only a little, depending on how high the US yield goes.

Chart

Outlook

The price of oil is the primary starting point for just about everything else, but it’s joined now by the new tariffs. A tariff on Brazilian goods, imposed by Trump in a fit of pique, begins this week. The Canada story has some time to run but the White House warns that additional tariffs are in the pipeline. The immediate worry is a new 100% tariff on all generic drug imports to begin two years from Aug 1 and move to 200% the next year.

Trump’s policy choices are inflationary. No wonder yields are creeping upward. The 30-year long bond is yielding the highest in a year, 5.131%. How much higher can it go? More to the point, when?

Forecast

Conditions are about as dire as they get. It may seem counter-intuitive, but we are nearing a point where traders throw up their hands and say “basta!” They may have extended positions to the limit, or their nerves can’t take it, or some other ruling sentiment, but stretched prices are a warning sign of an ugly reversal. It may be short-lived, because conditions can’t be expected to improve any time soon—not until talks start up again. But watch out.


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Author

Barbara Rockefeller

Barbara Rockefeller

Rockefeller Treasury Services, Inc.

Experience Before founding Rockefeller Treasury, Barbara worked at Citibank and other banks as a risk manager, new product developer (Cititrend), FX trader, advisor and loan officer. Miss Rockefeller is engaged to perform FX-relat

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