Japanese Yen

In the November issue of Global Resources Alert we told readers that our next currency of choice may well be the Japanese yen. While it doesn’t have much in the way of yield to shout home about as rates are as low as 0.1%, the yen does figure large when it comes to an escape hatch at times of elevated risk.

“While the yen also possesses risk aversion properties – it rallies when stocks sell off – it’s likely to play second fiddle to the dollar. Right now there are simply too many moving parts to make even an accurate estimate as to where the dollar might rebound to before it’s worth selling again.” Global Resources Alert, November 2009.

But on Thursday it was the dollar that made all the running and as it did, commodity prices recoiled from recent highs. Gold rang up a further record-breaking peak at above $1,123 per ounce before reversing course and crashing 0.7% to a closing price of $1,106. The dollar index meanwhile rose by around the same amount to 75.75. The dollar rallied also against the yen to 90.20.

Equity prices fell in Pavlovian fashion – there was little rhyme, nor reason. They just shrank as the dollar rose almost as if to say that a wave of year-end fear is set to cloud the markets. We don’t see much evidence building.

But we came across a rather interesting perspective on the state of affairs and a prediction for a big yen rally before too long. The view comes from forex head at Mitsubishi UFJ in Tokyo, Toshihiko Sakai. His views are of interest not because they conflict with our commodity bullish philosophy, but because he’s yen bullish too.

The difference between the two perspectives is a matter of timeframe – we noted in GRA that we may say an equity market rebalance, which would set off a bout of risk aversion. He arrives at a stronger Japanese yen because he believes that the only reason commodity prices are up is because the Chinese are hoarding them as an investment.

Mr. Sakai believes that China’s current growth phase only comes about courtesy of a torrent of government stimulus and isn’t likely to be sustained. On a rather worrisome journey down a dark alley, the faux growth is boosting raw materials prices and strengthening the value of certain currencies, particularly the Australian dollar.

That leads to some problems. Mainly, both commodity currencies are too expensive, growth is too high and when government spending proves impotent the delicate little set-up will come crashing down. And because the Aussie looks attractive, it’s drawing in money from carry-traders who borrow and sell short the Japanese currency to buy and invest in the luscious 3.25% yields of the Australian dollar. And since job growth just stepped up a notch in Australia this week, we should now expect a further 25 basis point rise from the Australian central bank at the start of December.

So when the scales tip in favor of weaker Chinese growth, Mr. Sakai believes that commodity prices cannot be sustained at current levels since demand really isn’t there. The almighty rush for the exit means that stock markets will come crashing down too and carry traders will dash like lightning for the exits creating disorderly forex moves. He says that by March 2010 the Japanese currency will rally five yen against the dollar to 85.00. The root cause he says is the breakdown of the ability of U.S. consumer spending to lead the global economy forward. Nor does he expect the return of consumption anytime soon with U.S. unemployment continuing to rise.

Nor will any other country to come to replace the U.S. It’s not the consumer that’s broken, but it’s the model that drove growth. The inherent instability of borrowing more to sustain manufacturing and growth abroad leaves the global economy rudderless.

Well, we’re as bullish on the Japanese yen as Mr. Sakai, but not yet nor for the same reasons. We believe that if stimulus measures run out the response will be simple. Do it again and again until it works. That is why we feel that the dollar will continue to weaken – because its government will play the lead role in creating and spending stimulus. The yen will very likely strengthen independently rather than on a further economic meltdown.

The Supreme Council of the Secret Order of Jurojin

Tyche Research

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