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The fading Yen?

06 March 2009

The Technical Trader’s view:

There’s a neat Double Bottom driving the Yen weaker – sufficiently powerful to smash the resistance from the low at 96.15 and beyond. The minimum target of the Bottom is easily measurable as far as 102 or so.
Will that continue though?

Look at the wider context…

On the whole we think progress beyond 102 will be rather unlikely without a great struggle. Those prior lows are powerful. So unless trading the very short term, the weakening Yen trade may be best avoided…for the moment

The Macro Trader’s view:

Until quite recently the strongest of the major currencies was the Japanese Yen:

- Against the Dollar the rally began in June 2007,
- Against the Euro, a little later; July 08, and
- Against Sterling July 07.

The move was fuelled in each case by emerging evidence that the US, UK and Euro zone economies were at risk of recession, whereas Japan was enjoying one of the longest periods of expansion since WW11.

However, more recently the Yen rally has not only run out of steam, but looks like unravelling completely. Not because the other major economies are showing any signs of recovery, quite the contrary:

In the US the Fed’s Beige Book released last night summarized the economy as still weakening and said recovery wasn’t expected until late 2009 at the earliest and possibly not until mid 2010,

In the UK the Bank of England cut interest rates by another 50bp today, taking official rates to just 0.50%, and still they judge inflation will undershoot the inflation target by the 2nd half of this year requiring policy makers to begin quantum easing, in an attempt to offset the weakness impacting the economy from abroad, and

In the Euro zone the outlook is no better; industrial orders, the main stay of the German/Euro zone economy continue to plunge and the ECB also eased by 50bp leaving Euro zone rates at an historical low of just 1.5%.

So why has the Yen suddenly become so weak?
The answer lies in the state of the Japanese economy; it is now also in recession with exports collapsing at around 45% m/m, industrial production dropping by 10%m/m and the Bank of Japan having once more to resort to quantum easing in an attempt to inject some life back into the economy, as official interest rates are already practically at zero.

What has been so amazing about Japan is that without the help of strong export markets, there is insufficient domestic dynamism to sustain economic growth.

After the “lost” decade, one might have expected Japanese consumers to be more able to support their economy as they satisfied pent-up demand, but obviously the economy’s recovery from that unhappy period of recession and deflation was only possible because the global economy was expanding so strongly. Now, without that support, Japan is unable to sustain itself.

Looking ahead, the US Dollar seems to have emerged as the markets’ preferred refuge or safe-haven trade and seems set to strengthen further against all the majors, but especially the Yen. The Euro and Sterling too, seem on the verge of a period of strength against the Yen, despite their own economic weakness. This seems to suggest that of the major economies, traders think Japan is at risk of outperforming the others on the downside.

Mark Sturdy,
John Lewis
Seven Days Ahead

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