Yen strength has begun to develop

So why don't the commentators know why?

It has been an interesting week in the forex market and eyes continue to be raised at the degree of strength shown by the yen. It opened last week at around 98.50 against the dollar and by Friday it has actually pushed below 95.00.

It’s pretty much in line with the bearish view I have held for a long time though, of course, my views are drawn from what some people view as witchcraft or mumbo-jumbo. I have to say though, much of the time it works very well.

So why has the yen been so strong?

The economic releases have been mostly weak, a few anecdotal signs of stability from tradesmen and consumer confidence beginning to level out. However, it hardly augers a turn in the tide.

Well, the dollar has generally been weak across the board, even against the European currencies and perhaps then it is hardly surprising that the yen is consequently stronger as a result of this overall dollar pessimism. However, that isn’t the full story. The Yyn has also been very strong against the European currencies coming close to the highest levels seen in April.

So just what has been the driving force?

When market commentators are lost as to why currencies move they fall back on past factors. “Risk aversion” was one – that Japanese investors are repatriating funds from overseas. “Corporate repatriation of offshore funds” has been another popular fallback.

Personally I feel it is unlikely to be either of these – at the moment.

Over the past 4-5 months, as the true impact of the global pre-depression has rocked the core driver of the economy – exports – the market has looked at the strength of the yen below 100 as being a “double whammy” that doesn’t make sense. It has driven the entire market into a false sense of security that “of course the yen should be weaker” and this has led to a move back towards carry trades. It can’t come as much of a surprise that the Australian and New Zealand Dollars have been strong during this period.

The market has also been favoring the dollar against the European currencies and thus, since there has been a reappraisal of which economy is worse (rather than which is stronger) the dollar’s weakness has had a larger impact against the yen due to the unduly high level of favor given to the dollar against the yen.

There is currently a big debate over whether it can continue.

It is very difficult for economists to overcome their “logical” arguments and most still see the yen continuing to be weak, that the current strength is an anomaly.

What must also be remembered is that Japanese corporations have, on the whole, fixed a budget exchange rate for the year at 95.00. A clean break below here is going to make them feel edgy and probably cause them to hedge some of their exposure – that is converting their dollar receivables.

Of course, they’ll take the conservative view and treat this yen strength as temporary so they’ll not cover much more than 2-3 months revenue. However, this will force the yen to become much higher and there will be a risk that this spills over into more risk aversion and repatriation of overseas investments.

From my point of view it has behaved perfectly in line with a much longer lasting period of yen strength. There has been a reaction today but I doubt that there’ll be a recovery much beyond 97.00. If I am right and the next move is lower and below today’s 94.54 low then the trend will continue to just below 92.00 over the coming 5-10 days and by early June back to the gloom and doom of the 87.00 area.

There will be a recovery but as far as I can see it will only be a correction and by late July or perhaps in to August I feel there will be more shocks. Only if the rate can get back above 97.00-98.00 would I begin to turn my view…

Ian Copsey



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