Surveillance: Yen Drop Shakes Up Currencies (Podcast)

do now is what Bloomberg Surveillance does best. We welcome all of you on radio and television to a clinic now with when Thin He's Global out of Currency Strategy and Brown Brothers hareman that barely describes as encyclopedic perspective on the history of foreign exchange and Pacific, specifically his Pacific rim that's a mouthful from Japan down to his Burma. Dr Finn, thank you so much for joining. I think we need to educate all, including myself, on the ancient

Japanese trajectory of needing to weaken the yend. The Yen starts out in ninety nine after World War Two, set at three sixty. It goes on to plause our Chord two hundred stronger yet stronger Yen. The Louivi Chord oops two years later we screwed up one twenty and then the shock which you and I lived in of to use a phrase from Boston, wicked strong Yen of eighty. What where are we at now at one thirty within

the ancient Japanese continuum to hate and dislike strong Yen? Well, first of all, thank you very much for having me, Tom, It's always a pleasure. Uh. You know, I think there's two things that we're really looking at right now. There's that old adage that you can never have too much of a good thing. The Japanese poassi makers have been uh looking for a weekend and higher inflation for years, if not decades, as you know, and they're finally getting it,

but at at a pace that is quite uncomfortable. Now, I want to circle back to what you what I think Jonathan mentioned about how they coln sort of square the circle and they can't. Professor Mundel, who had had the pleasure of having it in class in grad school, uh way back in the sixties, talked about the impossible trinity. You cannot run h have free capital controls, run independent policy,

and also influenced exchange rate. You cannot have all three, and so right now Japan has free capital flows and they are keeping uh materre post ultra loose. So there's it is as Mr Mundell, Professor Mundell would say, it is impossible to control the end. It's going to find its own level. Uh. The doubling down on your control, it stands out and starts contrasts. Earlier today the ricks Bank delivered a surprise hike. So when the ricks Bank

is more hawkish than you, that that's saying something. When in a situation like this one, I think we will recognize that you've just illustrates it. Something has to give. I wouldn't use that what something has to break? But something has to give. How do you get a read on on what gives? Is it in the government bond market or is it in foreign exchange? I would say John has stupid determined. You know it's it's um It's

not just a Japanese phenomenon. Also, obviously, this yeok of control could have been sustained if if globally bond hills had remained at low levels. And yet here we are, the US ten year is getting close to etcetera, etcetera. So it's making it much more challenging to me the Bank of Japan just delivered an ultra doubbish hole there. If you look at the forecast in the outlook report, they are saying no tightening through fiscally year twenty four.

They I think they kept their core inflation forecast around one percent um for both fistically year twenty four. That's quite a statement. I think at some point they're going to have to turn around. And my I think my feeling right now is that Krodo will keep this policy going through the end of his term which ends next year early next year, and he's gonna allow his predecessor, I'm sorry, his successor to sort of wrestle with. So

that's a year out. I know that sounds like an eternity um, but I think eventually we will have abandon our yield of control. I don't think it's gona happen anytime soon, but it's it's as unnatural, you know, having a tenure at zero percent is unnatural. So that is where I think it will go. But we are nowhere

near close to that pain threshold yet. In the meantime, when how much does this disrupt the idea of the yen as a haven trade, how much does this redirect flows simply into the dollar as the only haven left. Well that's a good point, so that that's really what the puzzle is right now. Over this last week or two of risk off activity, the end continue to weaken. So I don't like to put too much on one on one data point in one episode, but certainly something

will look out for. We did have some finding some uh some correction lower intelligen in response to risk off, but it's very ministruble, maybe one or two yen. I think this this week, and I think that, uh, this, this montery polagide diversion is really to me the driving force. Yes, we'll have a couple of bouts of risk off. Maybe the end strength is a couple, you know, a couple of one or two percent. But to me, the the underlying stories monetary policy diversions again is going to go higher.

M Dollyan is going to go higher. People throwing out one thirty five, I've heard one fifty. But I say, let's take one separate of time. Let's get to that two. Thou too high at one thirty five, and then let's see where things stands. Christopher and a Strtigues was just on and he was saying the knock on effects to China and the UN that we're saying overnight it's going

to be a big concern to the Chinese authorities. Are we expecting some sort of further intervention there in order to stave off some of the dramatic pace of moves, if not the direction. Well, China is obviously very interesting. Despite sort of sort of introducing more market maximums, they still have very heavy hand in markets like financial markets across across China. Now again I would point out to

monetary policies story there as well. People's make of China is actually even more delish in the sense that they are actually loosening posts right now. Japan is maintaining loose policy. See, but we're seeing the People's Bank of China reserve requirements. They've tweaked their interest rates lower. I think that more is coming, So that argus for more you want weakness more than the knock on effect. Of course, it's sort

of it's all kind of wrapped together. But to me, that monte pass divergence in pbo c s is even stronger. Um they can control the pace a bit a bit more than Japan can. Obviously they have again a very heavy hand. But make no mistake, dollar you is going higher as well. Doctor said, I don't want you to get in trouble with the general counsel of the August Bank Brown Brothers harem and I'm gonna phrase this very carefully.

To what you said two or three questions ago. What we're going to hear is bad people like that George Sorrows on Black Wednesday, quote are manipulating yen, are manipulating dollar, are manipulating the currency market? Respond to that, does the market tell these powers and institutions what to do? No? I mean, that's just a terrible trope about these these conspiracy theories. The market is the market. We have hedge funds,

we have real money. We are you know, speculators of course, you know, we have all corporations, we have all sorts of players in the phone exchange market. I would say, I would pause it right now that with the upwards of three point five trillion dollars a day of f X flows daily, that's it's getting much much harder to quote unquote manipulate the markets. It was easy back in the nineties when we had pegs. You know, we had

um capitals, are not as as large we had. Pigs are easy to break, uh so I of course it's always easy. Um. We see this a lot in emerging markets, whereas we always blame the foreign speculators. But it's a terrible trope that you know, I wish would would would really, you know, go go the way of wild West. That's just not the way the FX market is right now, Winston greant to catch up as a wife of Brand brothers. Harriman joining us now is someone who likes emerging markets,

who likes US stocks. It's widely the global chief investment strategist at the black Rock Investment Institute, Whitely, Let's start here, why do you still like the equity story? Um, if you think about the broader macro environment, indeed, we have more challenges now thinking about policy uncertainty, thinking about a

rate pushing higher. But if you think about the you know, like putting aside the year today kind of development real rate, we're still talking about really low levels versus historical UM averages and also the broader growth backroup. In our view, UM, the deal over from the war in Ukraine will impact

European economies a lot more than US economies. So our estimates of the this bill over growth impact for the US economy for this year is after zero point five percent GDP growth track, which is quite a lot smaller than what we're expecting for for European economies. So that being the case, we prefer US market over European markets. Yes, we do like emerging markets that but broadly we still

prefer developed market over emerging market. It's just that within emerging market we prefer to play it through local e M d versus e M equities. Right, currency, where you go right to where I want to go, which is local paper. I want you to give me the spill over on this new strong dollar black rock has to be riveted to the FFEX dynamics of yield and price briefits on that, how do you adjust to strong dollar

in this crisis? With the end crisis was the end? Well, indeed, what we have seen so far one thirty dollar end is the significant moves. We're talking about two standard deviations away from the Cabinet office break even estimate, right, so we're talking about really really incredible, incredible currency volatility and moves. But that's very much speaks to this world of policy divergence.

So on the one hand you have central banks like the PBOC and b o J. On the other hand, you have central banks like the FED and easy to be looking to get closer to neutral as quickly as possible. But specifically in the case of in the case of Japan, not only we have kind of the monetary side of

phase actually still remaining very very accommodated. Actually on the physical side of things, they are coming through as well, right like they recently just announced to for the eight billion dollars of the physical aid to ease the inflation pain. So so so very very different from the world that we're seeing in the US and Europe. In Japan, actually we're still seeing this um this this this support coming from both the monetary side of things as well as

the physical side of things. The Japanese yen should be a bit of a support for Japanese acquist given a historically the negative correlation between the two, but that correlation has condemn a little bit in recent years because a lot of the Japanese corporates actually moved their factories overseas, so that direct benefits is a bit less. But we like Japanese ouquts on the currency had basis. At this point, we're just taking a step back and quickly here is

the only haven currency left the dollar. Oh, that's a that's a that's a great question. So far, if you look at within currencies, the dollar has been the key, right, like that's where people hide when things things go wrong. But one has to also question at some point that the benefit of government bonds as a diversifier in portfolios. We have to kind of discussed at which point of use levels government bonds can be good again as diversifiers

in portfolios. Right, so so far they have not been good. Um, they have found the opposite of what we expect them too. But there is a level at which point tension funds are going to find government bonds attract and and and and as we moved further away from zero down to actually their diversification benefits would also come back in place. So that's that's something else that we're playing very close. Just funny, just to jump in in the amount of

time we have left. You said something really interesting. Then you like Japanese equity still on a currency hedge basis, just two questions, why would you hedge the currency? And to how expensive is it to do? That right now,

given the moves with saying that's a great question. Well, we turned positive on Japanese aquities earlier in the year, and we wanted to kind of hedge out the currency side of things because the negative correlation between aquities and currency, and also because the expectation for currency to weaken given policy divergence that is talked about a hundred and thirty. If we're talking about fresh entry into Japanese markets through currencies or through uh aquity markets, we probably would not

be too mum. It's being currency had because as I said earlier, this represents two standard division moved from the great even from the Cabinet office and hadging cost. Well, thank you if the blank Rock investment instituted right now. Joining us in Kiev is a most original mayor, not only the mayor of a beleaguered capital of this nation, Ukraine, but also acclaimed truly with his brother, the pair of boxing brothers in the world, with many many heavyweight champions.

But totally this is not boxing, this is not sport. There's a meanness here that you fought against an athletics for years. You state that the meanness of Vladimir Putin will go after these iconic symbols of your Kiev. When do you expect Mr Putin to go after those acclaimed churches and other sanctuaries. Um regards from Kiev, thank you for your question. But you can compare the right now citation in in Ukraine with support in Sport. You have

clear rules. If you break the rules, you will be desified, and especially right now in the war, we see the whole world sees no rules. The economy of our country is destroyed, is big drama for all population, not just in the whole country. Also a big drama in uh in the capital of Ukraine, is big drama for everyone. From forty million people who live in Ukraine, a lot of millions of refugees uh try to find their new homes. People doesn't have a job right now, economy doesn't work,

and right now they every day die people, civilians. And I talked many times this war, this war since less war is genocide of Ukrainian population because our city is destroyed. I talking about Mario Hartkieve, Erney in other and other cities which actually destroyed. And it's it's a big drama. Metallic Clio, the Mayor of Kiev with us today. We are so glad to get a sense of what's going on, but also horrified by what you talk about. How much

will it cost to rebuild the Kiev of old? Actually we have redtail is a huge impact for our economy, a lot of people job less, A big part of the people advocate to the safe part of the city. We have more than two hundred buildings. We were totally destroyed. They destroyed all in structure. To rebuild the buildings. I guess it's not so big money. It's around the hundred million US dollar, But we lose the money in a budget and our i CD we guesses around the one

one have billion US dollar. What our budget doesn't get they don't begin and and uh also I told you about their numbers right now, but we don't know how long will be the war and how much this would be cost in the next couple of weeks, maybe months, maybe years, mayor this is a delicate question. We hear about forty of the businesses in Kieva have reopened. Some

people are trying to come back to their homeland. How many people do you expect what proportion of people do you expect not to return because of the threat and because of the war, people is afraid and right now that people ask me as a general manager of hometown, we have to come and not we stay in in other places. I tell to everyone right now we can't guarantee the safety in in capital. Just a week ago the Russian record alleged in buildings in hometown and the

five civilians is dead, a lot of injured. By the ways, um more hundred people, two hundred citizens of hometown is dead and four children. Right Mary Klitchko, one final question, if we could, what weapons do you need right now from the Allies and from the United States, if you're afraid of further missile attacks again on symbolic Ukraine. What is the material you need now? We have to cover this air above our heads, but we need have weapons. I want to say depends the weapon because because we

defend our country. I'm not military, I'm not the officer of military forces. That's why I can't give you exactly names what we need, what we need, but we need the weapon definitely because we stay in strong against the strongest army the world, the Russian's army, and that's why it's uh will be not enoughly and we want to say sank so much to the the United States to support your brains were important. Mayor, thank you so much for

joining Bloomberg this morning Metallic Disco. Here's the mayor of Keep. Can we continue that conversation and the Troit dearborn in autos with John Lawler, chief executive officer Ford Motor, who has tattooed to is Iowa brain that you need to be in a Ford pickup truck to go from Ames, Iowa down to des Moine, Iowa. That's the way you do it in the midwest of this country, John, can you sell a new ninety dollar fully loaded electric pickup

truck on the East and the West coasts of this nation. Absolutely? In fact are early reservations and orders are highly skewed towards the California and the East coast. So absolutely. Now one other thing to point out. We do have high end pickup trucks um in the price rains that you talked about, but we also have the starting series at around forty dollars, so you know, we've made this vehicle affordable for um our commercial customers and as well as those that would want to enter into it at the

entry level series. What is the torque issue it came out. Now, this is a little bit engineering and it's away from the financial side of Ford Motor. But what people are saying is this thing can't pull like the other electric vehicles. You're in those meetings with your Knox engineering degree, help us with that. Is a torque there? Yes, this truck is fully capable. It's build Ford Tough, right. It has all the capabilities we see you need in a pickup truck.

It has the horse power, it has the payload, and it does have the towing. So UM we feel very confident this this truck will meet our customers and needs and it will represent Ford Tough as we UM have for many years with our F series John. That might be the look forward. The look now, though, is beset by a lot of supply chain issues which definitely were weighing on some of the supplies that you are getting in terms of some of your automobiles in the first quarter.

Going forward, you maintained your guidance though, even though you have seen production fall short of where you were expecting. How can that be? Well, you know, if you look at the first quarter, we had incredible demand for our products, all of our new products in fact, the Broncho, the Broncos Sport, the new Maverick, and then our electric fields, Machi, the Transit now the incredible f one fifty Lightning. So

we see very strong demand for our products. Now in the first quarter, we were disrupted by the modules um that we're constrained due to the chip crisis. We resolved many of those. We do see rate and flow of chips or the availability of chips improving as we go through the second half, and we're seeing great traction on

our forward plus plans. So improving chips uh great traction our forward plus plan in an increasing demand, in very high demand, and we see our volumes up this year versus last year ten to fift and that gives us confidence in reaffirming our guidance of eleven and a half to twelve and a half adjusted EBIT for the year. John, how much do you expect to raise prices on your Ford automobiles this year even the fact that demand is

to robust and supplies are still constrained. Well, we've we've taken pricing this year, and we are an inflationary environment. The pricing that we have taken has stuck and we'll continue to manage that. Um you know, you'll you'll probably see if inflationary pressures continue, commodity prices continue to increase, you'll see in additional price increases. But the other thing

that we're doing is we're also focused on costs. Is in an inflationary environment, you have to manage both ends, and so we're laser focused on increasing productive productivity and driving efficiencies through every line item of our income statement. John, I want and I don't want to get you in trouble with your general counsel, but I got to ask you this question. Full disclosure, folks. I grew up in a Ford family and my you you either had a Ford or a GM, That's all there was to it.

And my father had the original Bronco built Ford Tough was made in nineteen seventy nine. You guys are run with that forever. I've had the honor of talking to Bill Ford about it. The fact is Elon Musk thinks he has built Tesla Tough. How does Tesla deal with your Ford? Pick up? With Mary Silverado in the forty seven other e vs out there that have a history of Tough, We've got the iconic brand. We have f one fifty. It's the number one selling vehicle in the US.

We know what customers need, We know what Ford tough means. What are the What are the customers telling you, Johnny, I don't mean to interrupt, this is too important. What are the customers telling you they want? Is a purchase differentiator right now over Tesla. When you look at our product, we continue to make sure that it has the capability, it's a tool, it has pro power on board, it

has all of the capabilities I talked about earlier. They want that, plus they also want the amenities that you get with an electric vehicle that we provide the charging. That's a tool, that's an enhancement for them. So they're coming to us and saying they want the room, they want the capabilities, and they want the every the benefit

you get from having an EV power train. So customers want that benefit of you know, a clean emissions and everything else you get with the EV, along with no compromises to what you would expect from a Ford f one fifty, and we're delivering that hight John, great to can't shop to hear from you said thanks for beam with this this morning, John, Lord of that they fold Mota s S. This is the Bloomberg Surveillance Podcast. Thanks

for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom Keene and this is Bloomberg. Love Me Too.