Next week, the market will usher in two major events. On the one hand, the results of the French elections will be revealed. On the other hand, after the removal of the hard-liner head of Japan's foreign exchange, how will Japan respond to the yen's exchange rate, which has fallen again and hit a new 38-year low? These two major events will become the focus of market attention, and the global financial market may usher in turbulent waves.
On the French side, according to reference news reported on June 29, the campaign for the first round of voting in the French National Assembly election ended at midnight local time on the 28th, and the voting will be held on the 30th local time.
Agence France-Presse quoted a poll released by the French Institute of Public Opinion on the 28th showing that the far-right party National Alliance will receive 36.5% of the votes and be in the lead. Syriza will have 29% of the vote, while President Emmanuel Macron's camp will receive only 20.5% of the vote.
If the far-right National Rally wins, according to its platform, it may take the following actions in the future: halting immigration, initiating France's exit from the eurozone, initiating France's withdrawal from NATO, lifting sanctions against Russia, and stopping funding for Ukraine.
Against the backdrop of the rapid rise of the far-right in Europe, a victory for far-right parties in France would be a great encouragement to far-right forces across Europe. It could lead to the rapid spread of far-right forces across Europe, leading to political turmoil in the eurozone. At that time, the market's fears of a eurozone split will intensify, and the euro will fall sharply.
If France's far-left and far-right parties continue to lead in the first round of voting, it could lead to a larger bond sell-off and a wider divergence in interest rate differentials within the eurozone. There is a view that if the results of this round of voting cause panic in the market, the ECB may intervene.
On the Japanese side, according to Reuters, the Japanese government appointed Jun Mimura, director of the International Bureau of the Japanese Ministry of Finance, as the vice minister of finance, replacing Masato Kanda in charge of foreign exchange affairs on Friday.
Kanda actively defended the yen exchange rate, and during his tenure he launched several large-scale interventions in the yen exchange rate. On June 20, the U.S. Treasury Department announced that it would add Japan to the foreign exchange "watch list." As for the U.S. move, Kanda made a tough response.
On June 24, Kanda warned that the Japanese government is ready to intervene in the foreign exchange market 24 hours a day if necessary, and said that the United States' move to put Japan on the foreign exchange monitoring list last week will not affect Japan's policy choices.
As the peak of U.S. bond issuance approaches, the U.S. will never allow Japan to intervene in the yen through a large-scale sell-off of U.S. bonds. Japan's massive sell-off of U.S. Treasuries will not only trigger a rise in Treasury yields, but also push up interest costs and fiscal deficits. At the same time, it will also cause U.S. Treasuries to fall, investors to lose more, more U.S. Treasury holdings to thunder, and make it more difficult to auction U.S. Treasury bonds.
However, due to Japan's lack of funds, the size of US bond holdings accounts for 90.5% of Japan's foreign exchange reserves. If Japan does not sell US bonds, Japan simply does not have enough money to intervene in the yen.
Therefore, after the removal of Kanda, whether Japan will intervene in the yen again by selling US bonds next week has become the focus of market attention. If the market realizes that Japan will no longer continue to intervene in the yen against the will of the United States by selling US bonds.
At that time, the market will once again increase its shorting of the yen, and the yen will likely continue to hit new lows, leading to a collective decline in Asian currencies.
At the same time, since the dollar index is a relative index. The comparison of key economic data, monetary policy and other key indicators and political events between the United States and Europe and Japan will affect the trend of the dollar index, and the decline of the yen and the euro will push the dollar higher, and further increase the downward pressure on Asian currencies and cause financial market turmoil.
In the dollar index, the euro and the yen are the two most weighted currencies, with the euro accounting for 57.6%, followed by the Japanese yen (13.6%), the British pound (11.9%), the Canadian dollar (9.1%), the Swedish krona (4.2%) and the Swiss franc (3.6%).
At present, the fundamentals of the US economy are significantly better than those of the EU and Japan. In the first quarter of 2024, real GDP in the United States grew by 2.8% year-on-year, significantly higher than the EU's 0.4%, while Japan's real GDP fell by 0.5% year-on-year.
At the same time, the Fed's monetary policy is relatively more hawkish than in Japan and Europe. The European Central Bank (ECB) has already announced a 25bp rate cut on June 6, and interest rates in Japan remain at extremely low levels, well below those in the Eurozone and the US. The United States, on the other hand, has been slow to announce an interest rate cut. Therefore, against this background, there is room for passive appreciation of the dollar index.
As a result, if the euro falls sharply because of the victory of the far-right party in the general election, the political risk in the eurozone rises. A sharp decline in the yen due to the Japanese government's intervention in the yen's stance will be bullish and push the dollar higher. Let the dollar continue to maintain its strength against the backdrop of the Fed's non-interest rate hike.
Due to the recent rally in the US dollar, the renminbi has depreciated to a certain extent. But the depreciation was relatively limited, much lower than the yen, the South Korean won and other Asian currencies. If the dollar rises again due to the fall of the euro and the yen, it will also increase the downward pressure on the yuan in the short term.