Revisiting The Yen Dollar Rate

The yen dollar rate is about to break through the 100 barrier. As crude as the rate is as a one dimensional factor in looking at risk, it has served my purposes well. My views stayed the same on the yen dollar rate. A revisit to my two previous postings on the yen dollar rate:


March 11, 2009 posting - Readers will be familiar with my views on the yen. Yes, its an indicator of risk aversion although many more seem to regard the present yen's correction from 89 to 98 as more a reflection on the economic slump within Japan. Prior surge in the yen was driven by carry trade unwinding, a substantial shrinkage in US-Japan rate differentials, as well as the explosion in U.S. money supply versus static money supply growth in Japan. Beyond the unwinding of the carry trade, the yen’s fall also reflects worsening conditions in Japan’s export-driven economy and fears that the Bank of Japan will start flooding the market with funds to ward off deflation. It is very clear that Japan cannot operate lower than 90 yen to the dollar as most of their exporters have budgeted around 102-104 for 2009-2010.

It appears that Japan's finance mandarins still expect the strong yen phase, which as far as analysts can determine was caused mainly by a massive JPY20 trillion reversal of the yen carry trade. The yen has been a low-yielding currency ripe for funding carry trade positions in other higher-yielding assets. Some might say that the yen is falling because carry trade unwinding seems to have come to an end, not because the world is a safer place. That is a bit unfair to think that the yen's movements is mainly dictated by the carry trade. There was plenty of opportunity to unwind the carry trade, and which did happened, when the yen was moving around 110-115. The sharp gains which propelled the yen to 90 was a reflection of a flight to safe havens rather than a dramatic unwinding of yen carry trades.

Judging from the very low rates globally, the yen carry trade might not be the only popular transaction going forward. The USD carry trade or Euro carry trade might be the way to go. Plus both currencies have a bigger propensity to be largely weaker further down the road - a required recipe for a solid carry trade.

Figures from the Tokyo Financial Exchange (TFX) revealed that as of February 6, leveraged Japanese retail investors are now net long of the yen, meaning there are more buyers than sellers, for the first time since July 2006, when the TFX started posting positioning data. With the JPY’s status as a safe haven seemingly at an end – at least for the time being – it remains to be seen just how far it can fall. However, USD/JPY’s recent completion of a double-bottom technical pattern points to a near-term target of JPY 102-105. It can spike lower in times of extreme risk aversion, it cannot stay below 100 for long due to Japan's declining financial home bias; 110 for USD/JPY makes more sense than 90 over the medium-term. JPY/USD may fall below 100 in event of a dollar crisis, but won't stay there in the long-term due to:
1) economic decline from demographic shift,
2) large interest rate gap
3) yen failing to become key reserve currency
4) declining home bias of baby boomers



January 16,2009 posting - The Japanese yen was rising as aversion to risk took hold, with the U.S. dollar dropping to ¥88.87, from ¥89.04 late in New York. When markets were rising for the first few days of January 2009, the yen rose steadily from 90 to 94. Have to say again that the yen dollar rate is the best indicator to follow.

The posting on following the yen rate:

Cheap valuations are a reflection of risk aversion, the rush to US Treasuries is a sure sign of risk aversion, the rush to USD and yen are a sign of definite risk aversion.

Gem #1: Markets will only start a genuine recovery when risk aversion subsides

Gem#2: Risk aversion reduction will be immediately reflected in weaker USD and yen

The fall in USD over the last two days is more due to the zero interest rate regime enacted by Federal Reserve, so that should not be a sign of risk aversion reduction.

The best guide for locating current markets' bottom: WHEN USD and YEN BOTH STARTS TO FALL IN VALUE in a sustained pattern. When these two currencies fall, it show a willingness to move exposure into other currencies or assets, be it stock or bonds. Before they are reflected in the prices, the signal will be most apparent in the currencies.

However, even then we cannot really ascertain a buying trigger. So, my advice would be to break up you investing funds into 3 portions, get ready your list of stocks to buy.

Catalyst #1: When yen/usd rate moves back to 94, plonk down 1/3 of your funds

Catalyst #2: When the rate moves to 97, move the second portion

Catalyst #3: When the rate breaks 100, move the rest in

A point not missed here is that if yen weakens against the USD, the latter would be gaining in strength. However, I am using the yen/usd rate as a guide, as I believe when the yen starts to weaken, the USD would also weaken, but not by as much - i.e. the USD would gain ground against yen but at the same time lose ground against the euros and other major currencies. I use the yen/usd rate because that is most widely followed. The yen is used as the determinant because it was the most popular currency for carry trades, the unbelievable strength now is due to risk aversion as the Japanese exporters are basically losing money and cannot compete below 90.

p/s photo: Maki Nishiyama

Making Sense Of The Yen's Rise & Fall

Readers will be familiar with my views on the yen. Yes, its an indicator of risk aversion although many more seem to regard the present yen's correction from 89 to 98 as more a reflection on the economic slump within Japan. Prior surge in the yen was driven by carry trade unwinding, a substantial shrinkage in US-Japan rate differentials, as well as the explosion in U.S. money supply versus static money supply growth in Japan. Beyond the unwinding of the carry trade, the yen’s fall also reflects worsening conditions in Japan’s export-driven economy and fears that the Bank of Japan will start flooding the market with funds to ward off deflation. It is very clear that Japan cannot operate lower than 90 yen to the dollar as most of their exporters have budgeted around 102-104 for 2009-2010.

It appears that Japan's finance mandarins still expect the strong yen phase, which as far as analysts can determine was caused mainly by a massive JPY20 trillion reversal of the yen carry trade. The yen has been a low-yielding currency ripe for funding carry trade positions in other higher-yielding assets. Some might say that the yen is falling because carry trade unwinding seems to have come to an end, not because the world is a safer place. That is a bit unfair to think that the yen's movements is mainly dictated by the carry trade. There was plenty of opportunity to unwind the carry trade, and which did happened, when the yen was moving around 110-115. The sharp gains which propelled the yen to 90 was a reflection of a flight to safe havens rather than a dramatic unwinding of yen carry trades.

Judging from the very low rates globally, the yen carry trade might not be the only popular transaction going forward. The USD carry trade or Euro carry trade might be the way to go. Plus both currencies have a bigger propensity to be largely weaker further down the road - a required recipe for a solid carry trade.

Figures from the Tokyo Financial Exchange (TFX) revealed that as of February 6, leveraged Japanese retail investors are now net long of the yen, meaning there are more buyers than sellers, for the first time since July 2006, when the TFX started posting positioning data. With the JPY’s status as a safe haven seemingly at an end – at least for the time being – it remains to be seen just how far it can fall. However, USD/JPY’s recent completion of a double-bottom technical pattern points to a near-term target of JPY 102-105. It can spike lower in times of extreme risk aversion, it cannot stay below 100 for long due to Japan's declining financial home bias; 110 for USD/JPY makes more sense than 90 over the medium-term. JPY/USD may fall below 100 in event of a dollar crisis, but won't stay there in the long-term due to:
1) economic decline from demographic shift,
2) large interest rate gap
3) yen failing to become key reserve currency
4) declining home bias of baby boomers

Put it another way, we need the Japanese economy to play its part to help resuscitate the global economy, and they will not be able to do well if it hovers at 90 or below. The weaker it is, the better it will be for the rest of the world.

p/s photos: Dhini Aminarti Maulana

Yen/Dollar Rate Above 98, Good For Stocks?

Readers would be familiar with my yen-rate theory. I expected the weaker yen to signal less risk aversion, and hence a potential to move funds back into equities. The flight-to-safety play in 2008 didn't include gold. In fact, it was mostly concentrated in U.S. treasuries, the U.S. dollar and the Japanese yen.

The Japanese yen is down more than 10% since it peaked mid-December of last year. The yen has actually fallen below the levels seen at the height of credit anxiety during the October and November low points. However equities have not jumped as I expected. The yen typically rose with risk aversion as it did at the start of the collapse in mid-September of last year.The yen-dollar rate has scaled above 98 yen as write this.

Japan is more dependent on its exports for economic success than nearly any other nation. The global recession and the strengthening of Japan's currency has made it terribly difficult for its multinationals to sell products to the world. It does not seem that the Japanese government has done anything concerte to weaken the yen.

I believe that investors are beginning to take more risk with their money again. It's likely that the risk being taken is far more incremental. I see the initial move out of yen going to high-grade corporate bonds and maybe gold. It is still early days but its a good scenario for the willingness to move out of yen alone. There is a lot of liquidity on the sidelines, and there is only so much TIPs you can buy. Further improvements in the buying of corporate bonds will necessarily cause an inflow into equities.

Besides, Japan needs a weaker yen if the economy is going to be able to do its bit to improve its export-let economy. We don't need a paralysed Japanese economy. Sticking to the yen rate theory and gradually increasing equity weighting. Risk aversion may be abating, but the flow back into equities will be gradual and more gingerly in nature owing to uncertain markets.

p/s photo: Chen Kuang Yi