The end of free Japanese money

The macro point

Let's start with the figure. The euro went from 185.22 yen on August 31 to 178.56 on Friday, losing 3.6% in two weeks, 1.67% over the past week alone. The Bank of Japan raised its key rate to 1.00% on June 17, by seven votes to one, and Kazuo Ueda indicated on September 2 that the question of a further increase would be raised at each meeting. The market now assigns it a probability of around 79% for next Friday, at 1.25%.

How can a quarter point produce such a movement? Because it's not the rate level that matters, it's what it makes impossible. For two decades, borrowing in yen at near-zero cost to invest elsewhere has been one of the cheapest sources of funding on the planet. Closing this position requires doing two things at once: buying yen back, and selling foreign assets it was used to finance. CFTC data as of September 8 measure this: non-commercial participants went from 92,227 net short yen contracts on September 1 to 10,796 net long contracts, a shift of over 103,000 contracts in one week. Not everything is settled, and it must be said: the Australian dollar, one of the major currencies this carry financed, still holds its highs since mid-May. But yen sellers have left the table.

It's this movement that explains part of the current tension on long rates. The German 10-year Bund broke 3.50%, its highest level since August 2009, and the 10-year US came close to 5%. Japanese investors, led by insurers and pension funds, are among the largest holders of US and European bonds in the world, precisely because their domestic market paid nothing. Once rates rise at home, they have less need to seek yield abroad: they sell their securities and repatriate capital. These sales are on the same markets and at the same time, pushing long rates up everywhere at once.

The question remains why three central banks are tightening the screws at the same time, and the answer is in one word: energy. Eurozone inflation rose to 3.3% year-on-year in August, including 14.3% for energy alone; in the US, it reached 3.4%, with fuels up 27.4% over twelve months. The cause is unique: the Strait of Hormuz has been blocked since late February and Brent has gained about 9% over the week, at $104.61. This led the ECB to raise its deposit rate to 2.50% on September 10, and is expected to lead the Fed to do the same on Wednesday. Japan is the most exposed of the three, as it imports most of its energy: every dollar taken by the barrel is reflected in its consumer prices, and this is precisely what gives the Bank of Japan free rein to continue on Friday.

Technical point

The yen and the Swiss franc are the two major funding currencies in the market. This week, they did exactly the opposite of each other, and it's the most useful information from the sequence. The euro lost 1.67% against the yen, from 181.59 on September 4 to 178.56 on September 11, while gaining 0.95% on the franc, from 0.9364 on August 28 to 0.9451 on September 11, even as a ship was hit in the Strait of Hormuz and the barrel soared. Why this divergence between two currencies with identical roles? Because only one of the two central banks is moving. The SNB keeps its rate at 0% with inflation expected at 0.6% in 2026, and it reiterated on June 18 its strengthened willingness to intervene against excessive appreciation. Borrowing in francs remains free and will stay that way; borrowing in yen is no longer.

The rest of the market is at a standstill. The euro and the dollar moved within a narrow range all week: 1.1592 on Friday against 1.1622 seven days earlier, a 0.26% decline for the single currency, with a floor at 1.1578 and a ceiling at 1.1652, a 74-point range over five sessions. The reason is summed up in one sentence: both legs of the pair are treated the same way, as the ECB raised its rate on Thursday and the Fed is expected to do so on Wednesday. The pound is in the same situation at 0.85815, virtually unchanged, with a Bank of England expected in status quo at 3.75% on Thursday, and the Canadian dollar hasn't moved out of its range despite a barrel up 9%, with the euro going from 1.6038 to 1.6064. Three of the five pairs remain locked in a range, only one has broken out.

The supports and resistances shown below indicate respectively the low and high points within which prices should move during the week.

Announcements to follow

Three central banks in three days, and a diplomatic negotiation weighing more heavily than all three combined. The Fed opens the ball Wednesday night: it is the outlook table, not the hike itself, that will cause movement. The Bank of England follows Thursday, where the question is not the level but the vote distribution. The Bank of Japan concludes Friday, with a direct stake on the yen: the market has largely priced in the hike, creating asymmetric risk in case of disappointment.

Two releases merit attention beforehand: UK inflation on Wednesday, which will determine the tone of the Bank of England the next day, and US retail sales the same day, after a 0.6% decline in July which was the first drop in nine months. Finally, Monday's meeting in Oman focuses on temporary navigation corridors in the Strait of Hormuz. A concrete announcement would lower the barrel, thus easing inflationary pressure and part of the central banks' restrictive speech. A failure would produce the opposite.

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