Dollar Yen looks bearish,but....
22 July 2011
FUNDAMENTALS:
The safe haven status of the Dollar has recently been called into question by the stalled budget deficit reduction talks. The House Republicans want a significant deficit reduction package, which relies mainly on spending cuts, the Democrats and especially the President, want a package that focuses more on tax hikes where the rich pay more.
As a means of forcing the President to agree to their agenda, the House Republicans are refusing to allow an increase in the Federal borrowing ceiling. On August 4th the US will be in default if that ceiling isn’t raised.
The markets are clearly rattled and the Dollar has taken the strain.
Against the Euro, the Dollar hasn’t rallied as much as it might, given the Euro remains dogged by the still unresolved Euro zone Sovereign debt crisis.
But against the Yen, the Dollar is weakening. And there in lies the measure of the Dollar’s weakness. The Japanese economy is still trying to recover from the damage inflicted by the natural/nuclear disaster that struck in March, which not only disrupted domestic economic activity, but had a global impact too.
Many companies around the World, especially the developed world source parts from Japan as part of a just in time inventory management system. But after the March disaster parts have not been arriving in time, if at all.
But the Yen remains well supported against the Dollar and looks set to rally further.
Over recent weeks Japanese data has been steadily improving. After running a trade account deficit in the months immediately after the disaster, the latest set of trade figures show Japan back in surplus, that is how much the economy has regrouped.
However, Japan’s authorities are known to be negative towards a strong Yen. In the immediate aftermath of the crisis, the Yen soared in value against the other leading currencies, forcing the Bank of Japan and other global central Banks to intervene. The result was a sharp reversal, followed by over two months of sideways trading.
But now that the Japanese economy is showing clear signs of healing will the authorities may attempt fresh intervention if the Yen strengthens further from here. After the earthquake in March, there was a clear unanimity among the leading Central Banks and Governments that Japan needed help. Now that she is slowly getting back on her feet, that sense of solidarity may no longer exist.
The US has an economy that isn’t responding to the fiscal or monetary policy medicine previously administered, worse still the US is saddled with a bloated budget deficit and ballooning national debt. If the US authorities finally agree a plan to cut debt, they are unlikely to welcome a rising Dollar, since a stronger currency and fiscal austerity would act as an anchor around an already sluggish economy’s neck.
So the next question that needs answering is, will the Japanese authorities conduct unilateral intervention? The answer is yes they could, but its impact wouldn’t be as great as a concerted effort.
Traders probably sense this and that is why after a period of consolidation, the Yen is once more testing the highs. Can it go higher? We think it could be a trade worth the risk.
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