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The Yen, The Dollar And Elections

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The Yen, The Dollar And Elections

Will Denyer
5 Nov 2024
Over the last year, the effect of inflation, monetary policy, national elections, and a couple of central bank interventions has sent the yen on a wild ride against the US dollar. Next on the docket is the US general election, whose run-up has seen investors weigh in with trades based on a Republican sweep. In assessing where the USDJPY currency pair goes next, Will maps out some scenarios for potential developments on both sides of the Pacific.
A Grand Bargain And US Reindustrialization

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A Grand Bargain And US Reindustrialization

Louis-Vincent Gave
5 Nov 2024
When Donald Trump in 2016 won the US presidency, the first victim was Mexico. This time, the perceived victim is China. As Trump’s campaign momentum picked up through October, Chinese stocks went back to falling. Very few people in the market seem to think that a “grand bargain” with China is likely, but Louis argues there are reasons for both countries to want one.

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It’s The Geopolitics, Stupid

Anatole Kaletsky
4 Nov 2024
The conventional wisdom is that geopolitics does not matter to US elections, and the relative calm of financial markets in the face of heightened geopolitical risk suggests that it doesn’t matter all that much to investors. But Anatole begs to disagree, arguing powerfully that geopolitics has played a key role in domestic US politics recently, and will be an important driver of financial markets following the US election.

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Looks Like I Picked The Wrong Week...

Louis-Vincent Gave
4 Nov 2024
It is going to be a big week, with a US presidential election, a Fed meeting and the unveiling of China's fiscal stimulus package. Hopefully, it will see a number of important questions that may have held back investors answered—for better or worse. Louis analyzes various scenarios and proposes a number of safe harbors in case things don't go the way markets expect them to.

Gavekal Dragonomics

The Road To Reflation
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Andrew Batson
Trump Tariffs, Take Two?
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Thomas Gatley
Macro Update: The Pivot To Stimulus
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Andrew Batson, Dragonomics Team
Signs Of Life In Property
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Xiaoxi Zhang
The Robotics Boom Consolidates
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Tilly Zhang, Thomas Gatley
The Politics Of The Stimulus Pivot
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Christopher Beddor
Looking To Fiscal Stimulus
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Wei He, Dragonomics Team
The Channels For Consumption Stimulus
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Ernan Cui
The Fiscal Strategy Emerges
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Wei He
The Case For Monetary Policy
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Andrew Batson

More Research

The Yen Carry Trade Is Not Back
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Udith Sikand
Webinar: Pricing The Election Outcome
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Anatole Kaletsky, Yanmei Xie, Will Denyer, Arthur Kroeber
A US Election Lesson From Financial History
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Charles Gave
Britain’s Blundering Budget
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Anatole Kaletsky
Video: Good News And Bad For Reindustrialization
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Tilly Zhang, Tan Kai Xian
Industrialists Versus Economists
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Yanmei Xie
The Post-Election Policy Setup
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Louis-Vincent Gave
What If The Market Is Wrong?
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Tan Kai Xian
The Wild Ride Of EU Trade
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Cedric Gemehl, Yanmei Xie
Behind The Bond Sell-Off
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Louis-Vincent Gave

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Webinar: Pricing The Election Outcome

Anatole Kaletsky, Yanmei Xie, Will Denyer, Arthur Kroeber
1 Nov 2024
Markets are increasingly convinced that Donald Trump will win the US presidential race and Republicans may achieve a sweep of Congress. Yet with the key “swing states” still effectively in a dead heat between Trump and Kamala Harris, and well within the polling margin of error, the race remains highly competitive. Our panel assessed the underpinnings of the “Trump trade” but also explored macro and market scenarios in the event of Harris securing the White House.

The global view

Webinar: Testing The Reflation Hypothesis
A range of recent developments suggests that the world economy is moving into a period of higher nominal growth and persistent price pressures. China looks to be embracing a more concerted fiscal stimulus and, given the platforms of both presidential candidates, the United States is likely to stay in expansionary mode. Our panel assessed this situation and suggested investing strategies.
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Are Markets Starting To Price In A Trump Victory?
The Trump trades are back with a vengeance. As Donald Trump’s poll ratings have risen in recent days, some markets have registered outsized gains, others have suffered abrupt falls. In this paper, Louis examines six affected markets, from US tech stocks and financials, through energy and China, to Mexico and Argentina, to assess whether the moves make sense.
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Conversation: What Could Derail The Inflationary Boom
Looking across the macro landscape, Louis and Anatole observe a number of strongly reflationary factors and booming markets. Yet complacency never pays off for investors. So amid the escalating war in the Middle East and the prospect of further trade friction between China and the West, two of Gavekal’s many wise men discuss how investors can protect their portfolios from the risks to the current upbeat sentiment.
Changing Narratives Around The World
John Maynard Keynes famously observed that price discovery in financial markets was akin to a beauty contest. However, the real challenge was not to pick the prettiest lady, but to instead identify which lady the judges would choose as the prettiest. These were not always the same outcome. With this in mind, it seems that the past few weeks have witnessed a number of important “narrative changes” across different economies and markets.
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Chart of the Week

Week 44, 2024
Cyclical equities are beginning to outperform defensives and US high-yield corporate bonds are outperforming US investment-grade corporate bonds, suggesting that investors are starting to price in stronger US growth. Lingering summer concerns about an impending soft patch in the US economy were also crushed by the robust September payroll report. The Citi economic surprise index shows that since August 22, US economic data started to surprise less on the downside, and since October 1 has surprised more on the upside. Looking ahead, investors are likely expecting the potential for a wider fiscal deficit and easier Federal Reserve policy next year to put upward pressure on US economic growth.
Open Chart

Gavekal Research

Essential Reading: A Book For Every Week Of The Year

Gavekal is often asked for a recommended reading list. So, here it is: a book a week that everyone interested in the world of macro investing—whether hoary veteran or eager apprentice—can benefit from reading.

US economy & markets

The Yen, The Dollar And Elections
Over the last year, the effect of inflation, monetary policy, national elections, and a couple of central bank interventions has sent the yen on a wild ride against the US dollar. Next on the docket is the US general election, whose run-up has seen investors weigh in with trades based on a Republican sweep. In assessing where the USDJPY currency pair goes next, Will maps out some scenarios for potential developments on both sides of the Pacific.
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What If The Market Is Wrong?
Since early October, financial markets have increasingly been pricing both victory for Donald Trump in the US presidential election and also a clean sweep of both houses of Congress for the Republican Party. However, the apparent extent of the market’s confidence in a Republican sweep is not fully justified by recent opinion polls. If the election outcome is anything other than a GOP sweep, the market moves could be much more pronounced.
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The Election And US Debt Sustainability
Voters don’t seem to care about the ever-growing US debt mountain, but investors are concerned. In recent meetings across the globe, clients repeatedly asked the same three questions. What impact will the election have on the US deficit and debt? Is the US fiscal situation sustainable? And what will be the endgame?
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How To Devalue The Dollar
Donald Trump has complained about how the strength of the US dollar is undermining US competitiveness, while Kamala Harris wants to revitalize US manufacturing, which will be tough with such a richly-valued currency. But what will the incoming president be able to do to weaken the US dollar? Will Denyer assesses the options and their chances of success.
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Webinar: Pricing The Election Outcome

Anatole Kaletsky, Yanmei Xie, Will Denyer, Arthur Kroeber
1 Nov 2024
Markets are increasingly convinced that Donald Trump will win the US presidential race and Republicans may achieve a sweep of Congress. Yet with the key “swing states” still effectively in a dead heat between Trump and Kamala Harris, and well within the polling margin of error, the race remains highly competitive. Our panel assessed the underpinnings of the “Trump trade” but also explored macro and market scenarios in the event of Harris securing the White House.

Emerging markets

China Turbocharges EM Investment
As the rich world pulls up the protectionist drawbridge, investors risk missing a bigger story in emerging markets. Here, Chinese outbound investment is rebounding after the fallow Covid years, and is driving a new wave of industrialization that promises to lower the cost of the green-energy transition.
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Why This Time Has Been Different
During past episodes of risk-off volatility, the correlation between emerging market risk assets has shot up. But early August’s bout of market volatility saw a bifurcation in EMs, and no broader macroeconomic spillover effects—which speaks well of the growing maturity of emerging markets as an asset class.
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Video: The Yen Carry Trade And Emerging Markets
Usually when developed market volatility spikes, the world’s emerging markets fall victim to collateral damage. Things have been less simple this time around. Although Latin American currencies, especially the Mexican peso, have been hit hard by the unwinding of the yen carry trade, East Asian currencies have risen strongly. Udith Sikand explores what lies behind the divergence.
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A Budget For Modi 3.0
Concerns that Indian Prime Minister Narendra Modi would take a populist lurch were alleviated on Tuesday, as finance minister Nirmala Sitharaman pledged to reduce the deficit in the new budget, while maintaining healthy levels of infrastructure spending. But three new schemes to boost jobs, largely borrowed from opposition party policies, suggest that the government has heeded the lessons of the election.
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Latest video

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Video: Good News And Bad For Reindustrialization

Tilly Zhang, Tan Kai Xian
31 Oct 2024
Enthusiasts for the revitalization of US manufacturing have been heartened by recent news that TSMC’s Arizona chip fabrication plant is delivering higher production yields than the company’s fabs back home in Taiwan. This appears to be good news for the competitiveness of US manufacturing. But digging beneath the surface, Tilly and KX find things are less simple.

Middle East

Conversation: What Could Derail The Inflationary Boom
Hedging The Inflationary Bust
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What Next In The Middle East?
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Video: The Israel-Hezbollah Standoff
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Video: Aramco, Oil And Saudi's Economic Transition
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The Energetic Danse Macabre
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India chartbook

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India Macro Update: On An Even Keel

Udith Sikand, Tom Miller
5 Sep 2024
A slowdown in India’s headline GDP masks an improvement in the underlying drivers of growth, argue Udith and Tom. Now that election-related uncertainty is over, government spending should pick up and aid the incipient recovery in private consumption and investment. Indian bonds and equities should continue to fare well, with monetary easing likely to get underway soon.

China chartbook

Gavekal Dragonomics

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Macro Update: The Pivot To Stimulus

Andrew Batson, Dragonomics Team
29 Oct 2024
The new policy package China’s government is now rolling out is not its first attempt to halt the economy’s deflationary spiral, but this time the effort is more substantial. The package is still evolving, with more fiscal details expected in November, but the broad outline is clear. In our latest quarterly chartbook, Andrew and the Dragonomics team assess the stimulus package.

Europe's economy

It’s The Geopolitics, Stupid
The conventional wisdom is that geopolitics does not matter to US elections, and the relative calm of financial markets in the face of heightened geopolitical risk suggests that it doesn’t matter all that much to investors. But Anatole begs to disagree, arguing powerfully that geopolitics has played a key role in domestic US politics recently, and will be an important driver of financial markets following the US election.
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Britain’s Blundering Budget
Wednesday’s British budget confirmed Anatole's worst fears about the outlook for the UK economy and sterling assets. In this piece, he sets out the four key implications for businesses and investors, all of which are likely to deepen the gloom about Britain, at least until a U-turn in economic, trade and fiscal policy happens in the next few years.
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The Wild Ride Of EU Trade
The European Union has endured big swings in its trade performance over the last three years and the “interesting times” could be here to stay. Depending on the US election result, this rollercoaster ride may have only just gotten started, say Cedric and Yanmei.
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A New Era For Eurozone Bonds
Over the last three years or so, investors in eurozone fixed income have done well to keep duration short. Given recent bond market ructions and given that the European Central Bank is now accelerating rate cuts, Cedric asks: is this the time to extend duration in the eurozone?
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Strategy Chartbook

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US Strategy: Trading Politics

Will Denyer, Tan Kai Xian
27 Aug 2024
In November, US voters will decide who controls the White House, Senate and House of Representatives. The two parties differ significantly on key policy positions that will heavily impact the economy and markets. In this Strategy Chartbook, Will and KX compare the parties’ major policy stances and assess what they mean for markets—especially US equities, US bonds and the US dollar.

Equities

A Grand Bargain And US Reindustrialization
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It’s The Geopolitics, Stupid
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Are Markets Starting To Price In A Trump Victory?
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Election Optimism
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So Long, Soft Patch
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Conversation: What Could Derail The Inflationary Boom

Currencies

It’s The Geopolitics, Stupid
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How To Devalue The Dollar
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So Long, Soft Patch
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London Conference, September 2024
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The Direction Of The US Dollar
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Yen Carry Trades And The ‘Strong Dollar’ Myth
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Fixed income

It’s The Geopolitics, Stupid
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Behind The Bond Sell-Off
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A New Era For Eurozone Bonds
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Bond Market Reality Check
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The Election And US Debt Sustainability
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Towards A French Budget Crisis?
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Oil & commodities

Conversation: What Could Derail The Inflationary Boom
Hedging The Inflationary Bust
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The Energy Faceplant
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Who Is Going Bust?
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Video: Beyond The Slide In Energy Prices
Will Recent Trends Last?
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China tech

Xi Goes All In On Tech
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Webinar: Setting The Agenda For China's Plenum
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The Localization Drive Steps Up
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After The Melt-Up In Semiconductors
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Vietnam’s Bamboo Diplomacy
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Big Tech’s Rearguard Action
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Then Yen Carry Trade Unwinds

Video: The Yen Carry Trade And Emerging Markets
Usually when developed market volatility spikes, the world’s emerging markets fall victim to collateral damage. Things have been less simple this time around. Although Latin American currencies, especially the Mexican peso, have been hit hard by the unwinding of the yen carry trade, East Asian currencies have risen strongly. Udith Sikand explores what lies behind the divergence.
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More Questions Than Answers
It’s a dedicated Frenchman who consents to work in August. But the financial market volatility of the last week has seen Louis hard at it, fielding client questions about the outlook for global markets and economies. In this paper, he sets out the most salient questions, and offers his answers.
The Root Cause Of Summer Ructions
Investors are no longer seeing virtue in a Goldilocks scenario of moderating demand and easing price pressures, but having a summer freak-out over faltering global growth. Udith and Kai Xian diagnose the market jitters and say that the sell-off in high-yield currencies and tech stocks likely stems from movements in Japan rather than disappointing US economic data.
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The Yen And Deindustrialization
There is a theory out there which holds that the extreme undervaluation of the yen is a consequence of Japanese deindustrialization, as Japan Inc. has shipped its factories abroad, pushing Japan's economy into an irreversible trade deficit even while it continues to run a monster current account surplus. Not so fast, says Charles, whose analysis of Japan’s external balances throws up a different explanation—and suggests a compelling investment opportunity.
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From the archives: oldies but goodies

Deficit Deniers Of The World Unite
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Deficit Deniers Of The World Unite

Anatole Kaletsky
In our politically correct age the pressure to bow down before certain popularly accepted and apparently proven “truths” can be overwhelming. In the aftermath of the US elections, two such nostrums are unnecessarily vexing investors—the urgency of deficit reduction and fear of higher taxes. I believe that both of these obsessions will soon be forgotten.
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Are We Entering into Revolutionary Times?
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Are We Entering into Revolutionary Times?

Louis-Vincent Gave
The role of a society’s elite is to rise to the challenges of the times, and find solutions fitting to those times, even if this involves a radical break with the past. But the modus operandi for most leaders is to try and maintain the status quo. But if the problems are large enough, this does not work, and the same challenges reappear until either a solution is found, the elite is replaced by a new elite, or the country, system or civilization disappears.
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The High Cost Of Free Money
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The High Cost Of Free Money

Charles Gave
Perhaps the most famous economic law is the one that there is no such thing as a free lunch. By keeping US short rates at abnormally low levels beyond the financial crisis and as growth bounces back beyond the dreams of the wildest optimists, the Fed increasingly seems to be trying to ‘feed the US economy for nothing’. This is worrying, for extended periods of cheap money typically come back with a hefty price tag.
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