As Japan embarks on yen-depreciation efforts and Europe and the U.S. hold benchmark interest rates near zero, nations outside the global major-economy “club” may see their currencies strengthen, CME Group Chief Economist Blu Putnam said in an interview with CNBC’s Rick Santelli.
“Basically, you have the U.S., the UK, Japan and Europe all at zero rates, plus some quantitative easing,” Putnam told Santelli January 16 on the CME Group trading floor. “If we ever get a ‘risk-on’ market, you don’t want any of those currencies.”
For countries not in the “club,” such as Brazil or Mexico, “their currencies could go up. They’re going to end up cutting rates equal to their inflation rates, maybe even lower. India might even cut rates. Because all the currencies with a pulse — that is, with interest rates above 3 percent, 4 percent , 5 percent — they’re going to be the favored carry trade if we get a risk-on market.”
Yen depreciation also holds potential for unintended consequences for Japan itself, Putnam said, such as destabilizing the country’s government bond market, where 10-year yields hover around 0.75 percent. On January 16, the yen traded around 88.5 to the U.S. dollar, a drop of about 14 percent since the beginning of October.
A version of this post first appeared on CME Group Market Insights.