YEN: BUY OR SELL?
Nice analysis here from David Gaffen at the WSJ:
The strength in the U.S. dollar has been somewhat puzzling, but strategists have explained it away, rationalizing that the U.S. dollar currently has a “best house in a bad neighborhood” status. But another currency that has managed to hang in there in 2009 has been the yen, even though the economy in Japan has been worse than most of the other major industrialized nations.
The yen is down this year against other major currencies, but most of that selling has come in the last few weeks, and oddly, as a result of previous strength in the yen. Exports have dropped off sharply in Japan because of the currency’s gains against other rates around the globe, and that has depressed the economic outlook.
But it hasn’t been enough to result in a full-fledged rout of the yen. At the beginning of 2008, the euro bought 162.69 yen and the dollar bought 111.44 yen. But throughout 2008 and early 2009, investors have been furiously unwinding so-called carry trades, positions taken in riskier assets such as stocks and leveraged securities through borrowing in the low-yielding yen and buying in other countries. As a result, the euro fell as low as 114.91 yen in early February, while the dollar bought just 88.7 yen in late January.
“This economy was going down the tubes, and Japanese investors were buying overseas assets, and the yen was strengthening, and it was really the powerful forces of deleveraging that produced this move — a few years of carry trades had to be unwound,” says Meg Browne, senior currency strategist at Brown Brothers Harriman. She adds that momentum-oriented players had boarded this bandwagon, helping to accelerate the yen’s rally through February.
Since then, the yen has retreated. The euro now buys 130.39 yen, although that’s still far from levels seen in early 2008, and the dollar is at 98.6 yen. Of late, the ebb and flow of the Japanese currency has mirrored the moves in U.S. equities, as the yen tends to weaken when equities are stronger, a sign that investors are perhaps again taking the opportunity to borrow in yen to buy elsewhere.
It remains to be seen whether that will continue. The Japanese economy would benefit from a weaker currency, and strategists believe the yen will continue to weaken as more economic data suggests a dire outlook for the economy there. The influential tankan survey is due out on Tuesday, and it is expected to show a reading of minus 54, compared with a previous reading of minus 24, a sign of extreme economic weakness.
“That survey is one of these things that could entice some Japanese yen selling again,” says Sacha Tihanyi, currency strategist at Scotia Capital. “Anything that’s big and bad and in-line with that kind of very bad outlook has the potential to do that.”
Good thoughts. After the sharp sell-off in Yen from very overbought levels I think the currency begins to look attractive once again. The dollar has been the go to currency as global economies have tumbled and the dollar appeared to be the best currency in a bad lot, but I now believe the tide could be starting to change. The Fed’s announcement of quantitative easing was a clear sign that they want the dollar to go lower. Europe remains the weakest of the big currencies so the Yen becomes more and more attractive almost by default. Also, after a nice 20%+ move in the equity markets the Yen could serve as a nice hedge against any potential downside in stocks.
