From around August last year the dollar continued strengthening against just about all currencies on Earth with one exception. It actually collapsed against the yen and until the middle of December the yen once again assumed the mantle of the strongest currency on the planet.
This almost daily strengthening caused the price of Japanese goods to soar, resulting in industrial output plunging in January by 45.7 percent year on year. Now, car production has declined by 41 percent year on year and within just a few months the merchandise trade has gone into a deficit.
It is no wonder that the forex market, horrified by these figures, has reacted by selling the yen from its 87.10 peak to almost reach 100 over the past month. However, it probably won’t spend too much time above the 100 level if indeed it reaches there over the next few weeks.
Actually, I do feel it will.
I am extremely bearish for the dollar versus the yen this year but timing is of the essence and it isn’t quite the time for the yen to strengthen yet. Actually, I feel that the dollar will drop below the 1995 low of 79.70. However, that is a tale I shall tell another day.
Right now the market is in shock with how quickly Japan has seen its exports and industrial output drop. They are truly shocking figures. However, it can’t come as much of a surprise as it was plain as the sight of Tokyo Tower surveying the city around its vast iron feet.
While politicians and the Bank of Japan lauded the longest period of recovery in the economy since the days of the golden balloon economy it was very clear that it was all driven by the globalization bubble. As global trade grew, Japan benefited by hanging on to its coat tails.
However, what was easy to see was that this increase in GDP was having almost zero impact on the domestic economy. Growth came from exports and if they ever dried up, then so would the economy in general.
Right now the market buys dollar into every dip in the exchange rate. It is supported at around 94.70 and over the next two weeks I am expecting this to cause the rate to rally above 100 for the first time since November last year.
Don’t hold your breath for too long though. It won’t last for long I think.
This week is seeing the correction from the 99.67 high edge a little lower. However, it won’t be for much longer and I feel over the next few days we will begin to see an attack on the 100 level. By next week I expect I shall be preparing you for the expectation for the dollar to change hands for between 102.50 and 103.50.
I would caution against expecting much more than this – possibly we’ll not see any more.
I’ll cover my reasoning for why next week.
Other posts by Ian Copsey: