The global currency market has recently entered a delicate state of equilibrium.
Some believe this is the calm before a currency war;
others think the US dollar is gathering strength for a major offensive, while some argue that the dollar no longer has the capacity to wage such a war.
So, what is the true situation?
In the past few decades, whenever the end of a US dollar interest rate hike cycle was in sight, the global currency market would enter a tense and complex game, making the next moves hard to predict.
In June 2024, the current dollar rate hike cycle has lasted for 27 months, once again plunging the world into this eerie state.
After more than two years of dollar rate hikes, the global economy has taken a severe hit.
Finally, some countries could no longer withstand the pressure and decided not to follow the Federal Reserve's tight monetary policy.
In the past two months, following rate cuts by European countries like Switzerland, Sweden, and Denmark, Canada's neighbor, the United States, also joined the rate-cutting ranks.
Shortly after, the European Central Bank announced a rate cut. The UK hinted that the pound might start cutting rates in August, possibly even as early as June.
These countries have good reasons for cutting rates: on one hand, inflation has eased; on the other hand, their weak economies need rate cuts for self-rescue.
Despite this, the Federal Reserve decided to keep rates unchanged at its June meeting.
Recently, major global currencies experienced a round of minor adjustments, clearly showing the strong correlations between them.
After the euro's rate cut, it underwent a slight decline, dropping from around 1.09 to 1.07.
At the same time, the dollar index slowly strengthened, rising from around 104 to 105.5.
The yuan also experienced a slight depreciation, with the onshore yuan falling from about 7.23 to 7.25, while the offshore yuan depreciated to 7.27.
Similarly, the yen has been slowly depreciating and is currently nearing 157.8, gradually approaching its previous low of 160.
On the surface, these currency movements seem to follow basic rules: when the dollar maintains high interest rates while other currencies start cutting rates, the dollar naturally strengthens, and other currencies weaken.
Currently, as major world currencies outside the dollar are cutting rates, the short-term strengthening of the dollar appears reasonable.
In this round of global currency games, the yen stands out as particularly noteworthy.
Despite major global currencies cutting rates, the Japanese government and the Bank of Japan have not recently made any statements or hints regarding rate hikes or cuts for the yen, indicating that there will be no significant moves in the short term.
However, this does not mean that the Bank of Japan has done nothing. On the contrary, they have made important adjustments in another direction.
On June 14, the Bank of Japan announced that it would maintain its interest rates unchanged while also stating that it would start reducing its bond-buying program in July.
For a long time, the Bank of Japan has been injecting large amounts of yen into the market by purchasing Japanese government bonds to maintain a loose monetary policy.
Now, they plan to reduce their bond purchases, which means they will be reducing the issuance of yen in another way. This conservative strategy suggests that rate hikes are a more aggressive approach.
Many people noticed that after the yen rate hike in March, the Bank of Japan hinted several times at the possibility of further rate hikes.
However, this process was interrupted in April when the yen was shorted and plummeted.
After the major global currencies adjusted their rates and went through a round of fluctuations, a new delicate balance was formed.
At this time, any rate policy adjustments by the Bank of Japan could break this balance and even lead to drastic fluctuations in global exchange rates.
Will the Bank of Japan hike or cut rates?
The whole world is watching Japan's choice, but Japan seems unable to decide its fate independently.
Recently, Japan has not made any clear statements, possibly because the US, as its strong backer, currently believes that it is not the right time to adjust yen rates to gain a favorable position in the global currency market.
What does yen rate adjustment mean for the dollar?
Obviously, Japan, having just raised rates in March, is unlikely to cut rates now, as Japan's economic situation and inflation levels do not currently require a rate cut.
The market generally believes that if the yen hikes rates, narrowing the interest rate differential between the yen and the dollar, it will reduce the profit margin for yen speculation and the short-term arbitrage space for international short-sellers, thereby strengthening the yen and weakening the dollar index.
From this perspective, the yen rate hike in March could very well have been a weak resistance by the Bank of Japan against the dollar, while the shorting of the yen in April was a strong suppression by the dollar.
Therefore, to maintain the strength of the dollar, the US clearly does not wish for further yen rate hikes.
Amid this complex contradiction, the Bank of Japan chose to remain inactive and silent after a single rate hike resistance, which could be seen as a silent protest.
They did not cooperate with the dollar to allow the yen to plummet, suppressing the yuan exchange rate.
As a result, the yuan did not experience a sharp decline but instead remained stable, indicating that yuan assets did not suffer significant depreciation.
Of course, Japan is not saving China;
rather, it is choosing the strategy that benefits itself the most: a moderate depreciation of the yen can help exports and boost the economy, but an unlimited yen collapse would cause massive losses in yen assets.
In this delicate situation, the dollar also dares not act rashly, maintaining interest rates unchanged and continuing to observe market reactions and trends before taking action.
Similarly, as long as there are no drastic fluctuations, the yuan does not need to worry about slow appreciation or depreciation.
In the future, the global currency market will continue to move forward in this delicate balance.
The policy adjustments and market reactions of major central banks will interact with each other, influencing the direction of global economic development.
For investors and market participants, understanding and predicting these complex dynamics will be key to seizing opportunities and avoiding risks.
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