Monetary policy in Japan and Europe working more through asset price channel - AmpGFX

The research team at Amplifying Global FX Capital explains that we may be moving into a phase where Japan’s easy monetary policy works more through lifting domestic asset prices rather than weakening the JPY exchange rate. 

Key Quotes

“The later stages of US QE/zero rates policy in 2012/2013 appeared to work less through the currency channel and more through boosting asset prices.  In Europe, the EUR has been largely stable for some time and its QE monetary policy may also be working more through lifting asset prices.”

“Perhaps global investors heading into Japan equities are no longer routinely hedging the JPY currency exposure. Equity investors, viewing the largely trendless major currency markets over recent years, albeit with some sizeable swings, and more recently a weaker USD, may be moving funds into Japanese and European equities without currency hedges.  These equity flows may be playing a bigger role in currency performance than in previous years when monetary policy divergence and relative interest rates may have dominated.”

“Global equities have shown consistent strength this year, diverting investor attention away from other asset classes.  The US equity market has a relatively high P/E and appears more fully priced for perfection than many other markets.  Political risk in the US under a Trump presidency also appears to be growing, creating more uncertainty for both US equities and the USD. Investors may be seeking to diversify away from both the US equity market and the USD.”

“The JPY and EUR have also benefited from stronger trade performances, lifting their trade balances into surplus, while the US trade deficit has widened somewhat over the last year.”