The fiscal half year end fuels yen strength

But the dollar's strength should return from October

Life has returned to the forex market with the dollar breaking lower against all currencies, reflection of a reduction in confidence that the Fed is likely to raise interest rates any time soon.

Economic numbers remain generally positive, political statements trying to fuel more confidence that the worst of the recession is over. There is a growing trend of positive industrial production numbers, recovering trade balances and retail sales. These are still in their fledgling stages still, but political leverage must be made.

But not everyone agrees that the world can heave a sigh of relief.
Joseph Stiglitz, the Nobel Prize-winning economist, said the U.S. has failed to fix the underlying problems of its banking system after the credit crunch and the collapse of Lehman Brothers.

“In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz said in an interview over the weekend in Paris. “The problems are worse than they were in 2007 before the crisis.”

He added that the world economy is “far from being out of the woods” even if it has pulled back from the precipice it teetered on after the collapse of Lehman. “We’re going into an extended period of weak economy, of economic malaise,”

However, the market is resting its finger on the dollar-buying trigger in anticipation that the States will lead the world in the recovery and that will bring higher interest rates. Conveniently this week sees a slew of consumer price index and producer price index figures being released both sides of the Atlantic and it won’t take too much to fire the twitching fingers.

As it happens I have been pointing to a general dollar recovery starting from around the turn of September end, marked by a dollar cycle low that has potential to keep the dollar strong for the coming 6-9 months.

For now, the trend is down, but close to the culmination of the downtrend. In my last update I forewarned of yen strength pushing to 92.00 and probably further with my long-term target below 90, fueled mainly by tax breaks which have encouraged Japanese corporations to repatriate profits for the fiscal half-year end.

Indeed, on Friday the yen hit a high for this move at 90.20 and this is expected to extend to around 89.40-60 over today or tomorrow but expect a brief retracement from there. Still, even though we can expect the correction I still feel we can probably move closer to the 87.10 high seen twice so far.

From around 2-3 weeks time the tide should be changing so hedge Dollar payments now for a year ahead…

Ian Copsey



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