The Forex Report

Debt fears begin to rise

Last week was a relatively quiet week in the forex market. This allowed the yen to weaken on the back of the poor economic numbers which continue to highlight how the dead cat bounce in the domestic economy during the global expansion years is now returning to haunt both the government and Bank of Japan.

Japan’s exports to the rest of the world have halved over the past year, industrial production has plummeted by 38.4 percent and vehicle production by a massive 56.2 percent. No wonder the forecasts for this week are for unemployment to rise to 4.3 percent while the ratio of available jobs to applicants is expected to be down to a mere 0.64 to 1.

The sakura season and the scent of the blooming spring flowers are being overwhelmed by the stench of a rotting economy.

Obama may claim that he sees signs of improvement. I’m not sure what they are. Perhaps he was talking about the small rise in existing home sales or the modest rise in manufacturing numbers. One can’t blame him for clutching at straws.

G20 protestors in London are demanding action. George Soros has labeled it as “the make or break G20.”

Obama is splashing the cash, Britain is planning the same while Japan is about to send out cash to everyone … so it can be stashed away for a rainy day. Meanwhile, Germany’s Merkel stated emphatically “I will not let anyone tell me that we must spend more money.” She for one is not being drawn into a “double or quits” bet with the country’s economy placed as a chip on a global poker table…

However, the cash has to come from somewhere. The States has to auction US$150bn per week… Last week the British Government has had problems in its debt auctions and this has had repercussions for the sale of U.S. Treasuries.

Investors know that higher interest rates are on the way. Why increase holdings in debt at these levels of interest rates? The dramatic increase in governments’ debt means that the demand for money is growing equally dramatically and global governments are going to be competing with each other to acquire those funds. Without them the alternative is to raise taxes and to lower spending, both of which will have a negative impact on the economies.

So investors are holding back, waiting for the price of money to rise. Of course this means higher interest rates.

This may not sound very much like a column on Forex but I do have a point to make.

My cycles are telling me that the Dollar is about to make a dramatic high against the Yen over the coming week – maybe it has been seen already. Two weeks ago I alluded to the fact that have a tentative target around 102-103 following which I am expecting a significant decline in the Dollar’s value against the Yen into Q3. I feel we shall see a new historic low – below the 79.70 low in April 1995.

Tomorrow is the fiscal year end. Japan needs funds and there is a great deal invested in U.S. Treasury bills already. What we are seeing now is a make or break situation where that money may well be repatriated.

There are political pressures and my own personal feeling is a great deal of behind the scenes arm twisting by the States to make sure that Japan doesn’t repatriate those funds. However, the only way I can see my targets for Q3 being realized is through repatriation of investments in U.S. Treasury bills.

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