☀️☕️ A Yen Tsunami and a Big Mac

📝 Focus

• A Yen Tsunami and a Big Mac

📊 In the Markets

• H&M runs from Shein, Temu & TikTok Shop?

📖 MoneyFitt Explains

• 🎓️ The Dollar-Yen Carry Trade

💸 Personal Finance Corner

• Deflation: Exploring the Meaning, Impact, Winners, and Losers

📝 Focus

A Yen Tsunami and a Big Mac

The Japanese Yen (JPY) has surged 7% against the dollar since mid-November to ¥141.59, its strongest level since July (and after almost hitting a 33-year low earlier in the year) driven by a combo meal of central bank expectations thanks to statements from their respective chiefs: The Bank of Japan (BoJ) would be raising interest rates, and the US Federal Reserve would be cutting them.

It is not just the absolute level but the direction of change of interest rates between two countries that often translates into a (pre-emptive) move in exchange rates. Driven by the record fall in US rates after last week’s Fed statement, the US-Japan bond yield spread has been driven down to 3.2 percentage points from over 4.1 in mid-October. 

The resulting move in the exchange rate eases inflation pressure in Japan (since much is imported rather than the still-soggy wage and demand-driven inflation the country has been looking for decades) and with the economy slowing more sharply than expected, the BoJ is widely expected to maintain -0.1% interest rates in the upcoming meeting on Tuesday, but could well to do away with negative rates by April or June. 

Converging US-Japan interest rates would threaten the dollar-yen carry trade🎓, which is where traders would borrow very cheaply in JPY to invest in USD and other higher-rate currencies. The rising Yen would potentially lead to a reversal of what has become a tsunami of money. 

As we wrote in April (“New BoJ boss’ job: Don’t blow up the world”), “the immense bond-buying programme needed to keep interest rates down has meant that the Bank of Japan has bought up more than half of all outstanding Japanese government bonds (JGBs) and is now one of the largest players in the stock market. But the impact outside its borders is that the BoJ has been one of the most significant sources of easy money in the world, unleashing ¥465 trillion or $3.55tn of Japanese cash into the investment industry, including ¥54 trillion into global shares since April 2013. Japanese investors are the biggest foreign holders of US government bonds and among the largest in Australian, Dutch and NZ securities.”

(Also see: “Land of the Rising Yen… and The Great Repatriation?” and “End Game for the ¥ Carry Trade”, both from July.)

 ..... ▷ The economic concept of “purchasing power parity” (PPP) basically means that exchange rates will eventually move towards a rate equalising the prices of identical baskets of goods and services in any two countries. 

This is because traders would, in theory, buy in the cheaper country and sell in the other one and pocket the difference risk-free, a practice known as arbitrage. In doing so, they would bid up both prices and the currency of the cheaper country. 

 ..... ▷ Identical baskets of goods and services aren’t easy to calculate (the OECD uses over 3,000 for its PPP calculations), so in 1986, The Economist created The Big Mac Index.

A McDonald’s Big Mac was chosen because it is 1) juicy and delicious and 2) available worldwide and pretty much the same everywhere. To economists, the price of a Big Mac is derived from a combination of "many local economic factors, such as the price of the ingredients, local wages, or how much it costs to put up billboards and buy TV ads.”

The Big Mac index implied exchange rate is then the local price of a Big Mac (e.g. in Yen) divided by the price of a Big Mac in the base currency (e.g. in USD.)

To calculate whether a currency is under/over-valued, you just compare the Big Mac index implied exchange rate to the actual exchange rate. If the implied exchange rate is greater, then the currency is overvalued against the base currency and vice versa.

 ..... ▷ Currently, a Big Mac costs ¥450 in Japan and US$5.58 in the United States. The implied exchange rate is, therefore, 80.65.

The difference between this and the actual exchange rate, 142.08, suggests the Japanese Yen is 43.2% undervalued in the long term based on “burgernomics” (or Purchasing Power Patty.)

Big Macs are highly recommended but do not constitute investment advice.

Cover image credit: Antonio Fucito under CC BY-SA 2.0

🇸🇬 Singapore: Let’s Get MoneyFitt!

📊 In the Markets

European and Asian markets closed higher on Friday, taking the cue from firm US markets the day before, despite dampening comments from the BOE and ECB bosses.

Over in the US, the S&P 500 closed flat on Friday but clinched its seventh consecutive weekly gain, marking its longest winning streak since 2017 following the Federal Reserve's recent dovish shift. The Dow Jones (which we rarely follow) managed its third straight record-high close.

Comments from John Williams, the President of the Federal Reserve Bank of New York, cautioning against premature rate cut discussions may have dialled back some market optimism, but more likely, they were an excuse for traders to lock in profits before weekly trading volumes ease back ahead of the holidays. (Unlike other regional Fed presidents, the NY Fed has a permanent place on the Fed’s interest rate setting FOMC.) Friday’s "Triple witching" quarterly expiry of stock, index options and futures provided high trading volume at 20 billion shares, well over the 12 billion 20-day average.

A survey indicated improving domestic business activity in December, potentially easing concerns of a sharp Q4 economic slowdown, keeping the currently winning soft landing camp ahead of the dwindling recession crowd. 

This comes in contrast to worsening EU business activity data, which shows that the eurozone is likely in recession, even as several key indexes like France’s CAC-40 and Germany’s DAX hit new highs. The stock market is not the economy, and the economy is not the stock market.

H&M runs from Shein, Temu & TikTok Shop?

H&M saw sales drop 4% in the fourth quarter, worse than the 3% expected and well behind key rival Zara parent Inditex's 7% sales growth. But thanks to a cold snap in October and November, it came in ahead of the 10% fall anticipated after September's warm weather affected sales.

The Swedish retailer is prioritising profit margins over sales by selling pricier products to target more aspirational shoppers and reducing discounts. Its recent price hikes helped increase its operating margin from 3.9% to 5.9% for the first nine months of this financial year and the firm is targeting 10% by 2024. 

But its weak sales and slower price adjustments in the face of rising costs (compared to Zara) indicate a more price-sensitive customer base, which puts it solidly in the path of the Shein fas-fashion juggernaut. Retail and tech research firm Coresight gives Shein an 18% market share in fast fashion, just ahead of Zara at 17% and (high) streets ahead of H&M's 5%, particularly with Shein showing exponential growth in Zara and H&M’s home territory in Europe. 

 ..... ▷ Shein is moving beyond being just a site for cheap fashion to offering a wider range of products and price points.

But Shein’s core fast-fashion offering faces challenges of its own, not just from PDD’s aggressive, gamified and even cheaper e-commerce newcomer Temu (besides flying lawsuits, Temu’s US sales exceeded Shein from this June), but also from TikTok Shop, the e-commerce arm of the viral video platform… which both Shein and Temu use heavily for their own marketing.

TikTok Shop poses a multifaceted threat, besides offering similar trends and impulse buying temptations, especially among Gen Z.

By integrating seamlessly with the endless scroll of TikTok, it bypasses traditional search, potentially hindering Shein's SEO reach and with its built-in influencer network, TikTok Shop could leverage emerging trends faster. User-generated content builds organic trust.

And its bite-sized video format is great for influencer product demos and virality, potentially overshadowing Shein's static, mainly photo-based approach.