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Cailianshe News on July 8 (Edited by Zhao Hao)On Tuesday (August 6th) local time, former European Central Bank President Jean-Claude Trichet said that the recent rapid strengthening of the yen can be seen as a belated and healthy adjustment, so there is no need to panic about its broad market impact.

Trichet served as the second president of the ECB from 2003 to 2011. The first was Wim Duisenberg, the third was former Italian Prime Minister Mario Draghi, and the fourth was Christine Lagarde.

Trichet played an important role in the design, birth, development, and response to the euro's crisis. Before becoming president of the European Central Bank in 2003, Trichet served as governor of the Bank of France for 10 years starting in 1993.

Trichet

Trichet said in an interview that Japan's shift to a hawkish monetary policy, geopolitical tensions in the Middle East and disappointing U.S. employment data combined to lead to turmoil in global markets last Friday and Monday.

“In my view, all three of these factors played a role in the correction in USD/JPY, but this correction was long overdue, and everyone knew that the yen was in an unfavorable position, and the carry trade was very active for a long time.”

Generally speaking, currencies with higher interest rates are easier to buy, while currencies with lower interest rates are easier to sell. The "carry trade" of raising funds with low-interest yen and buying high-interest currencies is considered one of the main reasons for the previous depreciation of the yen.

But last Wednesday, the Bank of Japan decided to adjust its policy interest rate from 0% to 0.1% to 0.25%, and finalized the reduction in the scale of government bond purchases. The current governor Kazuo Ueda also sent a strong "hawkish" signal, pushing the yen exchange rate sharply higher. The dollar fell nearly 5% against the yen last week.

Entering the new week, safe-haven assets such as the Japanese yen, Swiss franc, and U.S. bonds continued to be boosted, while risky assets such as stocks plummeted. Kit Juckes, chief foreign exchange strategist at Societe Generale, commented: "Because you can't unlock the world's largest carry trade without paying a price."

"In some ways this adjustment can be seen as a healthy one," Trichet said. "Of course, we still have to be extremely cautious, but we have a good explanation for the adjustments we observed last Friday and yesterday."

“This is probably overdue and there are some positives in the U.S., Europe and the global economy and there is no need to panic - this is very, very important in the current situation,” Trichet said, adding, “I don’t see any reason to panic about the United States.”

The employment situation report released by the U.S. Department of Labor last Friday showed that the number of new non-agricultural jobs in July was 114,000, far below market expectations; the unemployment rate also unexpectedly rose to 4.3%, reaching the highest level since October 2021, and triggered the Sam Rule.

Even Claudia Sahm, the originator of the "Sahm's Rule" and former Federal Reserve economist, believes that "the United States has not yet reached the stage of recession," and pointed out that the Federal Reserve should not take immediate action. "At a time like this, it is important to remain calm.

Trichet pointed out that the US composite purchasing managers' index in July was still in the expansion range. According to data released by S&P Global on Monday, the final value of the US composite PMI was revised down from 55 to 54.3, which is still significantly above the 50 boom-bust line.

Like Sam, Trichet also believes that the current data does not support the Fed's "emergency/unconventional rate cut" - lowering the policy rate outside the regular FOMC meeting time. He believes that the current issue should be a 25 basis point or 50 basis point cut at the September meeting.

"Given everything we know, I don't think the Fed will proactively cause this unnecessary panic because the anxiety at this stage is not necessarily reasonable." He said that more data will present a clearer picture in the coming weeks.

Trichet also mentioned that although inflation rates in the United States and the eurozone are still above the 2% target, they have gone through a period of sustained slowdown, which should be attributed to central banks.