Change in Japanese monetary policy is reflected in “carry trade” operations and reduces the supply of US currency in Brazil
The real depreciated against the dollar on Wednesday (July 31) and Thursday (August 1, 2024) and reached R$5.74, highest level since December 2021. Even with the monetary decisions of the “super 4th” In Brazil and the United States, the rise of the American currency here also reflects another factor: interest rates in Japan.
The impact on the local exchange rate is caused by changes in operations called “carry trade”which consist of taking money at a low interest rate from one country (in this case, Japan) and investing it in another currency, where interest rates are higher (in this case, Brazil).
As Japan has a history of deflation, the Japanese central bank has maintained negative interest rates since 2016. Therefore, investors see the opportunity to borrow in Japan, convert the yen into dollars and invest the amount in Brazil – which, despite recent cuts, still maintains the Selic rate in double digits (10.50%).
But the carry trade It is no longer as attractive due to the change in the direction of Japanese monetary policy.
On Wednesday (30.Jul.2024), the BoJ (Bank of Japan) raised the country’s short-term interest rate to 0.25%, making it positive for the first time in more than 8 years. The move was expected, but it consolidates the strategy of reversing negative interest rates.
“This decision was already being priced in, but the BoJ’s timing was a surprise, as it was a dynamic that the market was expecting for the future”said the chief economist at Nova Futura Investimentos, Nicolas Borsoi.
After taking over the BoJ in April 2023, Kazuo Ueda signaled that it would be necessary to review interest rate policy if the country’s inflation remained “in a sustainable way” above the 2% target.
Unlike Brazil, which sets targets for official inflation not to be exceeded, Japan expects and desires a certain rise in prices, which is a sign that the historic deflation that corrodes the economy of the eastern country is being left behind.
DOLLAR FACTOR
The dollar is generally the currency used for trading operations. carry tradeand changes in countries’ interest rates impact the supply and demand for the US currency.
With the yen expected to be more expensive, investors are expected to unwind positions in the carry trade and take the resources allocated in Brazil and emerging countries (which historically have higher interest rates) to pay what they owe in Japanese currency. This changes the supply and demand for currency in the countries.
In practice, the movement brings more dollars to Japan and the yen appreciates, while dollars leave Brazil and the real loses value.
RECESSION ALERT
The financial market remains alert to signs of recession in the United States and, consequently, in the rest of the world. Fears of a decline in economic activity around the world are also contributing to the strengthening of the dollar against other currencies worldwide, as investors seek security in times of unpredictability.
“If we enter a recessionary trajectory, Japan should give up on raising interest rates further and the United States will start cutting rates. As central banks in emerging countries are more conservative regarding inflation, the market may once again look at Latin America with attractiveness because of the greater carry.”Borsoi said.
Goldman Sachs, Citi Group and JP Morgan began pricing in a 50 bps (basis points) interest rate cut in the US in September on Friday (2 August), taking the benchmark rate between 4.75% and 5.00%.
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