window open - for now By Omkar
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Since last month or
two, the yen's exchange rate against the US dollar
has been a puzzle. The yen is widely considered to
be a "safe haven" currency, one that is preferred
by one and all during times of economic/political
crisis. What makes the yen a safe haven is Japan's
current account surplus and, more importantly, the
fact that Japanese have been net international
investors for so many years.
It can be
said that Japanese can finance their
international investments. Adding to their
safe-haven status is another important fact in
light of the European Union debt crisis, that
Japan's huge debt to GDP (gross domestic product)
ratio is mostly domestic in nature. Due to these
reasons, the yen gains as safe haven asset. Proof
of that is the currency's strong gains against the
US dollar since 2008 from 130 to 79 (around the
Markets assume further
strength in the yen if the EU crisis intensifies
(and rightly so). However nobody knows exactly
when the EU crisis will erupt to its fullest
possible extent. Till then the yen remains a
puzzle for currency markets. It becomes a puzzle
because on one hand the Japanese economy is
worsening, while on the other hand its currency is
still preferred as safe haven asset.
Recent growth, consumption, and trade
balance data out of Japan has been disappointing,
still the yen refuses to weaken. The Bank of
Japan's verbal interventions and actual
interventions (in 2010 and 2011) failed to have
any long term impact on the yen.
the Bank of Japan would not intervene in the
foreign exchange markets. One reason is quite
obvious - the failure of previous interventions.
However, more important is that previous
interventions were conducted at times when the
euro crisis was not yet a full blown "crisis" .
Still markets jumped on a weakened yen. If the
Bank of Japan does intervene, the effect will be
erased within just one day.
Easing at the
current level of 79 will send the yen to 81-82
levels. However, that would also attract increased
demand from technical traders as failure to
sustain above 82 levels will be a sure shot "buy"
signal on the yen according to technical analysis.
If the EU crisis erupts post-intervention, the
combined momentum in yen would be so strong that
it would appreciate below 75 level against the
dollar within one week's time.
So it is
better that the Bank of Japan maintains the staus
quo in its monthly meetings. If anything, it will
at least keep technical traders away from going
long in Yen against the dollar. So it is pretty
much clear that in the short term the yen will
remain sideways against the dollar in the 78-80
However, the 200 pip range can be
exploited by following macro data out of the US.
Every time, we have better-than-expected data from
US, a short yen position can be initiated.
Similarly the yen would gain strength on weak US
The long-term outlook for the yen is
super bearish. Japan's debt, though domestic, can
spell trouble as Japanese demography consists of
an aged population who live on their savings. so
domestic expenditure is set to fall, which in turn
will reduce productivity and domestic income.
In short, Japanese are eating away their
existing assets. Once done, the Japan will be in a
debt crisis. It is generally stated that Japan's
debt being domestic is its greatest advantage.
However, the same advantage can become their
greatest disadvantage in the future.
the time being, traders/investors should look at
US macro data and trade in yen.
Omkar Y Godbole is an Indian
based currency trader/analyst.
Speaking Freely is an Asia Times Online
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