| Currencies: Relative Yield Curves and the G-3 Currencies
| | 关于国际贸易的论文
[摘要] the relative shape of the yield curves matters. in thinking how the shape of the us yield curve may affect the bilateral g-3 exchange rates, it is important to consider the relative shape of the yield curves. i suggest four scenarios with different implications for the g-3 currencies. the most likely outcome is: (1) neutral to positive for the usd index, (2) ambiguous for usd/jpy, but (3) negative for eur/usd.
the relative shape of the yield curves matters. in thinking how the shape of the us yield curve may affect the bilateral g-3 exchange rates, it is important to consider the relative shape of the yield curves. i suggest four scenarios with different implications for the g-3 currencies. the most likely outcome is: (1) neutral to positive for the usd index, (2) ambiguous for usd/jpy, but (3) negative for eur/usd. however, if i am wrong and a more severe version of 1994 materialises, the usd would be hurt.
my basic idea. after the surprisingly high core cpi read last week, the talk of the town is that the global easing cycle is over. i propose that we consider the net effect on exchange rates by comparing the yield curve of the us, on the one hand, and, for simplicity, those of the ‘rest of the world (row)’.
scenario 1. in this scenario, both the us and the row enjoy growth with inflation contained by pre-emptive central banks. given that the jpy is a ‘high beta’ currency and eur a ‘low beta’ currency, this should be negative for usd/jpy, eur/usd, and eur/jpy. the net effect on the usd index is ambiguous, but probably a small positive. this scenario is consistent with the ‘dollar smile’ concept. as the us leads the world into a recovery, the initial effect is usd-positive. but when the row eventually ‘catches up’, the usd should give back a bit of strength. eur/usd will sell off more in the first phase, while usd/jpy will sell off more in a later phase.
scenario 2. scenarios 2, 3, and 4 are distinct from scenario 1 in that there is excessive inflation, either in the us or in the row. in scenario 2, the us has growth with no excessive inflation, while the central banks of the rest of the world ‘fall behind the curve.’ i believe this will be a distinctly usd-positive environment, with the usd strengthening against both the jpy and the eur.
scenario 3. scenario 3 is the opposite of scenario 2: negative for the usd index, negative for usd/jpy, and positive for eur/usd. this scenario is a repeat of 1994, but with the row shielding the bond sell-off in the us. the fed, being the ‘nominal policy anchor’ for much of asia, has control over inflation. if it loses control, the usd will be punished for the sins of the fed. not only is the experience of 1994/95 consistent with this view, but a more powerful example is 1971-1973 when the fed lost control over inflation and the gold or usd standard was shattered. the bretton woods system was, in a way, broken by the fed. i’ve argued in my previous write-ups that a repeat of 1994 would be negative for the usd. this is a scenario in which the usd can really collapse.
scenario 4. this is the ‘ugly’ scenario of the bunch, with the whole world losing control over inflation. the currency call is more difficult to make: if the fed loses control over inflation and the ecb also breaches its commitment on inflation, while jgbs collapse, the net impact on the g-3 currencies is far from clear. in this scenario, both global bonds and equities may not perform well.
i believe scenarios 1 and 2 are more likely. in my view, fears of a repeat of 1994 are overblown. events in 1994 occurred mainly because the market was surprised by a very pre-emptive fed. but the fed has repeatedly told the market that it would be ‘patient.’ even if the fed starts tightening early (e.g., august), the subsequent series of tightenings will be gradual in my view. if anything, the risk of a bear steepening is outside the us. euroland, for example, will likely see its headline inflation return to its 2.0% ceiling (the dip in headline inflation in recent months reflected more the ‘base effect’), even with the underlying growth momentum turning south. though i continue to believe that the ecb does not want to cut rates further to stimulate demand, it does not have the scope to tighten with demand being so weak.
the boj is likely to be the ‘most patient’ of the bunch, despite the fact that japan has been the fastest growing g7 economy in recent months. with the recent improvement in us economic data, i no longer believe the boj will be the first to tighten; the fed should clearly be the first. in any case, the trajectory of nominal gdp growth has risen at an amazing pace. to me, this must translate into a steepening in the yield curve in japan, with 10-year jgbs selling off gradually over time, reflecting positive developments in japan.
bottom line. four distinct possibilities should be considered in thinking about how twisting yield curves in the world could affect the g-3 currencies. in the most likely scenarios, the net effect should be (1) neutral to positive for the usd, (2) ambiguous for usd/jpy, and (3) negative for eur/usd. in the event i am wrong on inflation in the us, i.e., 1994 is repeated, the usd could be severely punished.
（摩根斯坦利全球论坛, stephen l. jen (from tokyo)）
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