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Can the Yen rally further on economic weakness?

02 February 2009

The Macro Trader’s view:

The Yen has clearly outperformed all the other major currencies over recent months. Indeed, since August 2008 the Yen has enjoyed a powerful rally against the Dollar, Sterling and Euro. This could superficially be explained by the well-publicised economic weakness which has hit those economies, together with a rapid and significant deterioration of the public finances in the US, UK and Euro zone as governments have been forced to pump vast amounts of money into their economies and Banks to avert both a collapse of the financial system and the risk of a deep slump.

However, Japan has not been immune to these forces either:
- Growth in Japan has clearly slowed to the point where they are back in recession,
- Exports have suffered enormously through economic weakness abroad and the Yen’s strength, and
- Inflation on the core measure has fallen virtually to zero.

So, why do investors prefer the Yen?
In the US, apart from a very weak housing sector and enfeebled banking sector, industry and the real economy are also badly affected. Unemployment rocketed at its fastest pace in over

60 years in the final quarter of 2008, and the once-mighty auto sector is virtually bankrupt, relying on government handouts to stay afloat. In the UK, the position not only looks much the same, but in many cases is worse. In its attempt to avert a financial crisis and support the economy, UK government’s debt to GDP is set to soar from 40% pre-crisis, to well over 70% in the next year or so. And these figures already look overly optimistic as they were based on growth projections issued in the November pre-budget report which are already redundant.

The Euro zone looks no better either. The German economy is set to experience its worst recession since WW2 and member countries have also pumped billions into their banks. Moreover, several smaller Euro zone economies, including the not-so-small Spain, have had their sovereign ratings reduced, on concerns of fiscal sustainability.

This bodes badly for the Euro zone and dents the prestige of the Euro.

And even though Japan seems to be fairing little better industrially:
- Car maker Honda has been badly affected,
- Nomura has announced a massive loss and needs to sell parts of its business to raise capital, and
- Industrial production has recently contracted by 9.6% as bankruptcies soar.
she has been has been here before. And the news isn’t full of Japan organising a massive stimulus as in the US, neither do we hear of Japan organising a 2nd bank bailout in less than three months.

So the comparison of Japan to the other major economies is relative than absolute. Japan is experiencing economic difficulties, but the collapse of the US, UK and Euro zone has been so swift and far-reaching that by comparison Japan appears relatively stable. FX trading is about relative strengths, both real and perceived. The Yen been able to benefit has in the current environment. And the trend looks well set.

The Technical Trader’s view:


This looks interesting: the trend has paused at an important Fibonacci retracement, and during the pause formed a continuation Triangle which completed last week.

In a wide-ranging week of price action since, the bottom of the Triangle was tested and yet the market looks as if it is about to confirm last week’s breakdown today

And anyway, isn’t that a Double Top? The trouble is we wondered about that last week and the fierce rally early this week was disappointing. But the Triangle still looks good.


Here’s the detail of that attempted rally that failed. The bottom of the Triangle was strong and resilient. If only there was a clear bear pattern in the daily charts! Then we would be short. So still we watch and wait. Despite the tempting long and medium-structures ….

Mark Sturdy, John Lewis
Seven Days Ahead

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