Ralph Shell @ 2:07 PM, Wednesday March 10 2010
The last rally the dollar had versus the yen was sponsored by the Non-Farm Payroll report, showing fewer job loses than anticipated, and indications that the Finance Minister was urging the Bank of Japan to increase the money supply. This move has stalled short of the 91 level.
As the evidence continues to grow that the global recession has ended, the yen, because of it's perceived safety, becomes less attractive. Yesterday's report that Chinese exports has surged in February to 46% above last years levels confirms their recovery is progressing. Tonight we get a number of Chinese reports including Industrial production forecast to be up 19.5%, and retail sales up an amazing 18.3% from year ago numbers. As one of the Chinese's biggest trading partners, Japan will benefit from the increased activity, but their recovery seems to be lagging.
The Japanese report for core machinery orders came in -3.7% versus an expected -3.8% and 20.1% a year earlier. Later today we get the final report on the 4Q GDP expected to come in at a meager 1.0%. The final GDP quarterly price index is expected to be -2.9% as deflation continues to haunt the Japanese. It was reported today in the Australian that Japanese consumer prices slipped to a -2.2% in December, and 1.7% in January.
Deflation has been a problem for the Japanese over the past decade, but despite the pleadings of Finance Minister Naoto Kan, the Bank of Japan is resisting. This morning Bank of Japan policy board member Tadao Noda said as quoted in the Australian today:
"We need to be mindful of the risk of BoJ long-term bond purchases
being interpreted as monetising debt, triggering rises in long-term
interest rates that deviate from the economic outlook," Noda warned last
week.
There, he said it: debt monetisation (printing money to buy
government debt, put crudely).
But whereas Noda artfully
suggested monetisation could be only a market misconception, because the
BoJ would not deliberately do such a thing, Kan wants the central bank
to soak up new government borrowing."
Where does this impasse between the Bank of Japan and the Finance Minister leave the market? In the short term, the Bank of Japan's reluctance to flood the market with currency may boost the yen's value. Longer term it appears there are some negatives for the Japanese economy, that will trump the current squabble. As mentioned before, the global recovery negates yen demand, but there are some other issues. The aging population will start withdrawing from their estimated $15T savings as they leave the shrinking work force. The Japanese, with debt approaching 200% of the GDP, are at risk should rates increase. Today the US is auctioning $21B of 10 year notes, expected to yield 3.72%, a 232 basis premium over the current 1.4% Japanese 10 year rate. With practically every developed country in the world needing to borrow record amounts of money, how are rates not going to work higher?
It is always dangerous to take a longer term view of a currency pair, especially when highly leveraged, but it looks like the odds favor the yen to lose to the dollar. Look to buy a pull back in the 89.50 to 90 area.
Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.