Yen faces bleak long-term prospects
IG INDEX
CHRIS BEAUCHAMP
The yen suffered a sharp drop on Tuesday following a double-whammy of bleak news for the Japanese economy. It fell initially after a report on April’s factory output showing growth was even lower than forecast, at 1 per cent rather than 2.2 per cent, and then retreated even further after Moody’s followed Fitch’s lead and put Japanese debt on negative watch, with the threat of a possible downgrade within three months.
Yesterday’s steep fall has undone much of last week’s movements, and reinforces the longer-term view for the yen in the post-earthquake environment. Both the Japanese government and the Bank of Japan will be doing all they can to keep the national economy afloat, highlighted by news that the Bank of Japan (BOJ) will lend an additional ¥829.6bn under its “growth industries programme”. This pushes the bank close to its limit for current lending, paving the way for a discussion about additional support.
It’s hard to see any real catalyst for the yen to move higher while the BOJ remains set on loose monetary policy and the US Federal Reserve inches ever-closer towards some degree of tightening. In addition, memories of the coordinated G7 intervention to weaken the yen remain fresh in everyone’s mind, keeping traders wary of pushing the yen too high lest they provoke the wrath of central bankers. A return to ¥82 and beyond is quite likely.
LONDON CAPITAL GROUP
ANGUS CAMPBELL
Since the terrible earthquake back in March, dollar-yen has managed to stabilise back above the ¥80 mark. Just after the earthquake the yen saw a huge rally, as investors believed that the currency would see a huge rush of buying, as people repatriated funds in order to pay for the clear up. A similar thing happened after the Kobe earthquake back in January 1995, when the yen rallied 20 per cent in three months, but this time round we have not seen anything like a similar reaction.
The current levels we’re at in dollar-yen also coincide with the same levels seen sixteen years ago and so there’s a huge amount of support for the dollar here, making it difficult for the cross to break and push on below the ¥80 mark. Japan faces many structural problems, a budget deficit like no other, and only yesterday Moody’s announced that they are reviewing their bond ratings for a possible downgrade. Such a move has pushed the yen lower and the weakness in the yen could continue for some time.
However, the fact that dollar-yen has closed below ¥80 on a few occasions shows that there might be another attempt by yen bulls to push it higher. If you consider the ¥80 level on an inflation-weighted basis, when it hit there back in 1995, the equivalent level today is roughly ¥60, due to the bouts of deflation that Japan has experienced in the past decade or so.
HIFX
CHRIS TOWNER
When looking at the performance of the yen over the past few years, and weighing up all that Japan has been through, not only over the past few months, but also over the past two decades, it is hard to fathom why this currency remains so strong. To put the current strength of the Japanese yen into perspective, in the summer of 2007, just before the credit crisis struck, you could buy 250 yen for one pound, and now you can only buy 135. This means that, despite the yen being somewhat dampened by the deflationary spiral that has trapped Japan over the past two decades, it is now almost double the value it was, making Japan expensive for us Brits.
The outlook for the yen is that it is likely the currency will weaken. The devastating earthquake, tsunami and nuclear crisis may deter foreign investors from investing in Japan. Added to this, cash-rich Japanese corporates will need to compensate for weakness in their domestic economy by acquiring foreign businesses in more buoyant markets. With the yen so strong, foreign markets such as the UK and the US look attractive. Take, for example, the capital investment of the Japanese firm Hitachi to build trains in the UK. On top of this, we have seen intervention in the forex markets by the G7 in order to curb the Japanese yen from rising further. With the yen over-valued, G7 support and Japanese corporates hungry for return in foreign markets, the stars are aligned for a weaker yen.
SPREAD CO
IAN O’SULLIVAN
Before the earthquake crisis hit Japan, dollar-yen was actually starting to display signs of bottoming out around the ¥81 level and had managed to break above a downtrend resistance line in place since mid 2007 around the ¥82 level. Of course, this attempted recovery was shattered by the earthquake, as the yen rallied some 650 pips in four days as investors speculated on the direction of the yen due to repatriation and insurance flows. The G7 intervention reversed this in an equally brutal manner and right now dollar-yen sits just above the 50 per cent retracement level of the ¥76.49 to ¥85.50 move at ¥81.
With the lasting damage the earthquake and the tsunami have left behind, Japan’s economy is going to struggle for a while to come. Factory orders and GDP are weak.
With Moody’s and Fitch putting Japanese debt on negative watch and the Bank of Japan (BOJ) intent on keeping monetary policy loose, it all points to upside in dollar-yen. Add in reports of massive buy orders all the way down to ¥80.00 and that China has been recently buying dips and there are solid reasons to be going long rather than short at the current mid-point it sits at.
It needs to break mini trend resistance at ¥81.75 and again around ¥82.05 where both the 38.2 per cent Fibonacci level comes in and the 100-day moving average. If it can break that we could well see ¥83.50-¥84.00 hit before the end of the summer.