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Speaker 2: Welcome to the Daybreak Asia podcast. I'm Charlie Peal at
Speaker 2: the Yen advanced sharply on Monday. This comes after Japan
Speaker 2: confirmed its first joint intervention with the US and currency
Speaker 2: markets in fifteen years and warned it is ready to
Speaker 2: act again after the en last week slid to a
Speaker 2: four decade low. Japan's Finance ministry says it intervened in
Speaker 2: the market on Friday in coordination with the US Treasury Department.
Speaker 2: President Trump earlier said the US joined the currency market
Speaker 2: intervention as a sign of friendship with Japan, adding that
Speaker 2: he expects Washington to repate financial benefit from helping the ally. Separately,
Speaker 2: Treasury Secretary Scott Besson said in a post on x
Speaker 2: that the US stepped in to help fight quote disorderly
Speaker 2: movements in the yen and is ready to keep helping Japan.
Speaker 2: And to get more on the story, we heard from
Speaker 2: the head of Asia Economics at Oxford Economics, Louise lou
Speaker 2: She spoke with Bloomberg's Paul Allen and Heidi Stroud Watts.
Speaker 3: It's it's a lot of it's a lot of things
Speaker 3: happening to get at the same time as Japan, right,
Speaker 3: I think a lot of the weakness around the currency
Speaker 3: has got to do with you know, structural underlying fundamentals,
Speaker 3: in particular at its current stage, you know, the fiscal
Speaker 3: poist from the government. So I think so long as
Speaker 3: that stays unchanged, and so long as you know, the
Speaker 3: fact remains unmoved in its in its interest rate, then
Speaker 3: we should continue to see some of these currency weakness
Speaker 3: coming from Japan. So you know, the intervention may work temporarily,
Speaker 3: but to the extent that markets continue to think that
Speaker 3: the Bank of Japan is behind a cuff, I think
Speaker 3: that weakness will prevail.
Speaker 4: Yeah, the Bank of Japan moving at utterly glacial speed
Speaker 4: on tightening and showing no real urge to pick up
Speaker 4: the pace either. Is the pressure starting to build? When
Speaker 4: do you think we might see tightening?
Speaker 3: Well, our base case is still that the Bank of
Speaker 3: Japan would high grate in December, which feels like an
Speaker 3: awfully long way away. But I think, you know, to
Speaker 3: the extent that we have, for instance, higher oil prices
Speaker 3: aggravating the terms of trade shock along with a weaker currency,
Speaker 3: to the extent that we have that I think Marcus
Speaker 3: may start to think that the economy has a real
Speaker 3: risk of falling into tacfulation, and so you know, the
Speaker 3: bets against the faster BOJ rate heights will go up.
Speaker 3: The concern here is that, you know, faster rate heights
Speaker 3: may support the yen temporarily, but it would be quite
Speaker 3: negative for the economy that really hasn't been very strong
Speaker 3: domestically and organically. So you know, the economy remains quite
Speaker 3: structurally vulnerable to the kind of terms of trade shop
Speaker 3: that could feed through quite quickly.
Speaker 1: December feels like a long way away from beerj particularly
Speaker 1: at a time when there's increased volatility and FED expectations. Right,
Speaker 1: are you in the camp? You know, insofar as obviously
Speaker 1: the be a massive impact on emerging markets and Asian
Speaker 1: economies and for the Japanese yen, as we've been talking about,
Speaker 1: which can be you in when it comes to the
Speaker 1: FED because Vetcher Walsh has kind of been keeping markets
Speaker 1: and economists in the dark as to how he plans
Speaker 1: to travel this road of finding inflation.
Speaker 3: Yeah, I think, yeah, I think the concern around the
Speaker 3: FAT is no longer you know, whether it would increase rates,
Speaker 3: which is always a case for emergent markets or whether
Speaker 3: or not it would actually stay pod. The concern here
Speaker 3: is that there is just not much visibility, right, and
Speaker 3: I think a level of transparency is not going to
Speaker 3: cause currencies to be weaker in the region. It's just
Speaker 3: going to cause a lot more volatility and therefore a
Speaker 3: lot more corrections post fact. And I think that is
Speaker 3: you know, something that central bites can't really grapple with
Speaker 3: at the same time, whether they have to to still
Speaker 3: deal with, you know, inflationary risks domestically. So I think
Speaker 3: that that opagueness is going to drive more volatility, but
Speaker 3: also possibly more policy errors are coming out of Asia.
Speaker 1: We now have another sort of pause when it comes
Speaker 1: to potential US around talks. We see the oil market
Speaker 1: certainly reacting, but how do you view the pass through
Speaker 1: when it comes to the recent revival when the gains
Speaker 1: that we have seen in oil prices.
Speaker 3: Yeah, I think the past through well, even before you
Speaker 3: know where we were the CEAS file point, which was
Speaker 3: you know, sometime in June, it did feel like, you know,
Speaker 3: oil prices might have bottom out and you know, inflation
Speaker 3: expectations could have been arrested. But obviously since then there's
Speaker 3: a lot of all of the listing the oil prices,
Speaker 3: and I think for Asian economies, the past through hasn't
Speaker 3: really been complete, right. We do have a lot of
Speaker 3: the h a lot of the hitline CPI being muted
Speaker 3: because of some of these government interventions they were in
Speaker 3: place that helps subsidize and cap the headline crisis. But
Speaker 3: underlying inflation expectations have actually been increased, and a lot
Speaker 3: of the economies where we see more complete pass through,
Speaker 3: where you know, there hasn't been the influence of subsidies,
Speaker 3: prices have actually started trending up and hasn't really stopped
Speaker 3: that up trend. So, you know, in the coming months,
Speaker 3: and especially in the CPI data this week, we are
Speaker 3: expecting that inflation will continue to stay quite elevated. And
Speaker 3: that reflects not the fact that the headline breadth prices
Speaker 3: have come down on gonna. It reflects the fact that
Speaker 3: refined fuel, which is what matters more for Asian economies,
Speaker 3: have continued to stay quite elevated, and I think that
Speaker 3: will keep central banks in the region on a more
Speaker 3: hawkish path than we previously anticipated.
Speaker 2: Louise lou head of Asia Economics at Oxford Economics, speaking
Speaker 2: with Bloomberg's Paul Allen and Heidi Stroud Watts bringing you
Speaker 2: their conversation on the Daybreak Asia podcast. Welcome back to
Speaker 2: the Daybreak Asia Podcast. I'm Charlie pellantt amid us intervention
Speaker 2: with the yen in Japan, bond investors say the risk
Speaker 2: of a deeper treasury route is rising as FED chair
Speaker 2: Kevin Walsh keeps investors in the dark about how officials
Speaker 2: will respond to the evolving economy. The treasury market is
Speaker 2: signaling that Warsh's inflation fighting credibility is eroding after he
Speaker 2: declined to outline how he plans to curb price pressures.
Speaker 2: When policymakers left interest rates unchanged last week, the result
Speaker 2: is steeper borrowing costs for the government, homeowners and companies,
Speaker 2: with the rate on the thirty year treasury at a
Speaker 2: nineteen year high. And with more on the story, as
Speaker 2: well as an outlook on South Korean exports, we heard
Speaker 2: from Julia Wong, North Asia CIO for Nomura International Wealth
Speaker 2: Management and she spoke with Bloomberg's Paul Allen and Heidi
Speaker 2: Stroud Watts.
Speaker 5: We think that the focus for yen this week obviously
Speaker 5: based on the intervention given what's being flat by the
Speaker 5: officials UH, and that's going to determine against the near
Speaker 5: term direction for the currency.
Speaker 3: UH.
Speaker 5: If there's a forceful intervention, we could see probably at
Speaker 5: the yen reate testing one fifty five or levels around that.
Speaker 5: Is that really a game changer for the currency. Look,
Speaker 5: we think that you know, the currency is really driven
Speaker 5: by uh the inflation in Japan is driven by oil
Speaker 5: prices and the concern over fiscal fiscal policy, and that
Speaker 5: really translates into the rates differential between the US and Japan.
Speaker 5: Uh that macro backdrop is not getting more favorable for
Speaker 5: the end is actually going against the n SO. I
Speaker 5: think against this big backdrop of from a macro perspective,
Speaker 5: the fax policy strategy, maybe it's more about uh SO
Speaker 5: slowing the pace of en depreciation rather than really seeking
Speaker 5: to turn it around from a directional perspective. So, yes,
Speaker 5: we think that for the for the week, probably we
Speaker 5: can see some more trupiness and probably more temporary yeah
Speaker 5: and strengths. But we do think that this does not
Speaker 5: change actually direction for dollar in and probably could still
Speaker 5: continue to go higher once the intervention is behind us.
Speaker 4: Yeah, what's the role of the Bank of Japan and
Speaker 4: all of this sort. They don't even appear to be
Speaker 4: playing a role at the moment. I'm more doing a
Speaker 4: sloth impersonation. If Friday's meeting was anything to go by,
Speaker 4: it do you see the Bank of Japan feeling motivated
Speaker 4: now to Titan sooner rather than later.
Speaker 5: Well, I think there is some motivation because you know,
Speaker 5: the obviously the lack of action from the Bank of
Speaker 5: Japan slower the expected move has been one of the
Speaker 5: one of the reasons. And you can see some upgrades
Speaker 5: of inflation forecasts. Uh, some internal more internal debate at
Speaker 5: the BOJ But does this is this enough to really
Speaker 5: propel them to make take a more aggressive stance overall
Speaker 5: on the pace of rate hike. We actually do doubt it.
Speaker 5: So I think there's a case for maybe moving forward
Speaker 5: the December rate hike now to October, so we do
Speaker 5: see that as a more live meeting. But we still
Speaker 5: see as roughly like a you know, once every six
Speaker 5: month type of policy rate move. And it's really hot
Speaker 5: given what's going on in the global economy from Middle
Speaker 5: eastward to what's going on now the tach trait and
Speaker 5: all of that disruption that's playing out in the equity market,
Speaker 5: we actually see a very tall hurdle for the Bank
Speaker 5: of Japan to really go much faster than our forecast
Speaker 5: for two rate hikes every year. So if they move
Speaker 5: forward the December meeting to October, we actually still see
Speaker 5: the next rate hike probably somewhere in mid twenty twenty seven.
Speaker 1: So I guess the question is if they don't feel
Speaker 1: like they can move any faster, that phade from this
Speaker 1: intervention could come pretty quickly without fundamental restructuring of that
Speaker 1: differential between the US and Japan.
Speaker 5: Yeah, so I think the differential unfortunately is moving away
Speaker 5: from from Japan. Uh. And you know, if the US
Speaker 5: front end have priced too hike, so maybe even more
Speaker 5: than that by the fad in the next year or so.
Speaker 3: Uh.
Speaker 5: The Bank of Japan, we don't think that they really
Speaker 5: have what it takes to move faster. So if the
Speaker 5: for the forward markets are right, then we probably have
Speaker 5: seen the narrows of rate differential between Japan and US
Speaker 5: in the cycle, and going forward that rate differential is
Speaker 5: going to actually widen. So that speaks to maybe more
Speaker 5: strengths for the dollar, at least particularly from the front
Speaker 5: end rate perspective. Less so for Japan, so I think
Speaker 5: that interest rate differential really does determine a lot of
Speaker 5: where dollar yen is. But of course the carriage trade, uh,
Speaker 5: what the sentiment is for equity market also matters from
Speaker 5: a carriage traite perspective, that is going through a little
Speaker 5: bit of volatility at the moment. But our thesis is
Speaker 5: that we think that there's enough growth uh, both in
Speaker 5: the real economy as well as powered by AI that
Speaker 5: probably will still keep equity market in a book market
Speaker 5: range for the next year. So both of that factor
Speaker 5: speaks to I think probably a still continue grind up
Speaker 5: higher for dollar, yet maybe at a more gradual pace
Speaker 5: now because the Bank of Japan and Treasury now is
Speaker 5: showing their hands and the strong preference for more gradual
Speaker 5: pace of depreciation.
Speaker 1: Jolly, let's talk a little bit about that tech story,
Speaker 1: because obviously it's been pretty chaotic, particularly for Korean markets,
Speaker 1: and that's sort of still bleeding through. If you look
Speaker 1: at this as a leverage washout if you will, and
Speaker 1: we kind of resume gains, or do you look at
Speaker 1: this as is further to go for a kind of
Speaker 1: fundamental restructuring of how investors view the amount of investment
Speaker 1: that's going to AI and how much you know they're
Speaker 1: going to say that this is worth.
Speaker 3: Yeah.
Speaker 5: So I think that overall very quickly for the overall
Speaker 5: tax trade. I think you know, there are two headwing.
Speaker 5: One of the head when is long and needs going
Speaker 5: ever higher. It's not a problem for tech for now,
Speaker 5: but it would be for medium term if we continue
Speaker 5: to see a gradual grind up higher in long lane
Speaker 5: race in the US. The second headwind is the volatility.
Speaker 5: That's because of the leverage and something that we were
Speaker 5: worrying about in our media outlook that sometimes sometimes the
Speaker 5: price is right, but the market structure through which we
Speaker 5: got there speaks to incredible volatility and fragility to come.
Speaker 5: So Carea is a very good example of that. I
Speaker 5: continue to see that being a headwind for this market,
Speaker 5: the particularly for memories. I do think that the fundamental
Speaker 5: has changed a little bit compared to where we like
Speaker 5: to trade the most, which was early in the year.
Speaker 5: That is because even though the men's supply imbalance is
Speaker 5: still there, we're heading to twenty twenty seven now and
Speaker 5: that is when more of the capext will start to
Speaker 5: come through. And now you have China joining the supply
Speaker 5: landscape as well, so that speaks to maybe potentially the
Speaker 5: risk of a quicker adjustment on the demand's side. We
Speaker 5: do see more rationalized by hyperscalers in the US from
Speaker 5: a demand side perspective as well, So mess applying balance
Speaker 5: is still there, but we're counting down to the time
Speaker 5: to get more corrected. So I think that we are
Speaker 5: probably more new too positive, but less positive compared with
Speaker 5: early in the year, and the volutility from a leverage
Speaker 5: perspective doesn't help that. So our preferred way to play AI,
Speaker 5: which is still a fundamental thing for next two to
Speaker 5: three years, is actually look at you know, what's been
Speaker 5: a message from the earning season this time, and that
Speaker 5: is that some companies, not everyone, are able to money tize,
Speaker 5: and investors reward those who are able to monetize by
Speaker 5: allowing them to build up more leverage and borrow more.
Speaker 5: So we think that actually there's some that have shown
Speaker 5: the strength in the earning season, there's some maybe they
Speaker 5: are punished a little bit more than we think they
Speaker 5: should be. So a lot of the focus probably will
Speaker 5: go back, I think, to some of the hyperscalers in
Speaker 5: the US now, given that the earning strength has been
Speaker 5: so impressive, and I think that's probably in the market
Speaker 5: where the rich reward the pocket market where the rich
Speaker 5: reward is the best of an AI trade perspective.
Speaker 4: In terms of the AI trade. What's your approach to
Speaker 4: the China side of that story, how's your allocation there?
Speaker 4: Because you know, we've got the Shanghai composite, the cs
Speaker 4: I three hundred, both soft year to date, this is
Speaker 4: a market relatively insulated from the Iran War other such factors,
Speaker 4: and a escent but pretty successful AI story as well.
Speaker 4: What's your allocation?
Speaker 5: Yeah, So for China AI, I think there's two three
Speaker 5: broad parts. The parts, way like the most at the
Speaker 5: moment is actually still the hardware story that goes into
Speaker 5: the global supply chain because we are positive about overall
Speaker 5: IF development. We see a lot of continued capacks even
Speaker 5: though not ever ever higher, so there's more rationality, but
Speaker 5: still overall capack strength is going higher. So we think
Speaker 5: that the part of China supply hardware space that goes
Speaker 5: into the global supply chain can still benefit the risk
Speaker 5: of in expual band et cetera. Notwithstanding, that's still the
Speaker 5: part where we see the most visibility in terms of
Speaker 5: earning growth. China still also does have a lot of
Speaker 5: strength in terms of models, but we think that that's
Speaker 5: very hard to monetize because the competition is so intense,
Speaker 5: So watching closely for clue or innovation, but that's not,
Speaker 5: you know, very profitable at the moment. And the last
Speaker 5: part is China. China large cap tech and they've rallied
Speaker 5: in July because of the rotation into underperformers, so they've
Speaker 5: gone up quite a bit. Maybe it's still a little
Speaker 5: bit more to go, but we're heading in to earnings
Speaker 5: as well for those guys. And the takeaway from message
Speaker 5: earning season message overall this time is that investors will
Speaker 5: scrutinize company by company your ability to really monetize the
Speaker 5: cap AAX. So if you believe that certain companies can monetize,
Speaker 5: then their stock is due to buy. But they've actually
Speaker 5: rad it quite a bit, so I think from a
Speaker 5: rich reward perspective, hardware, an overall global supply chain within
Speaker 5: China is still we want to go. So that's the
Speaker 5: space we'll probably would look to be buying a dip
Speaker 5: or a buy into weakness.
Speaker 2: Julia Wong North Asia CIO for Nomura International Wealth Management,
Speaker 2: speaking with Bloomberg's Paul Allen and Heidi Stroud Watts, bringing
Speaker 2: you their conversation on the Daybreak Asia podcast. Thanks for
Speaker 2: listening to today's episode of the Bloomberg Daybreak Asia Edition podcast.
Speaker 2: Each weekday, we look at the story shaping markets, finance,
Speaker 2: and geopolitics in the Asia Pacific. You can find us
Speaker 2: on Apple, Spotify, the Bloomberg Podcast YouTube channel, or anywhere
Speaker 2: else you listen. Join us again tomorrow for insight on
Speaker 2: the market moves from Hong Kong to Singapore and Australia.
Speaker 2: I'm Doug Chrisner, and this is Bloomberg