Ralph Shell @ 1:50 PM, Wednesday May 19 2010
Once again the USD, US Treasuries and the yen are the preferred safe destination for international hot money during turbulent times. The plight of and the flight from the hapless euro started this trend. Initially the yen strengthened smartly as speculators who had been heavily short the yen futures, bought 36,095 contracts in the period ending May 11.
Speculators, however were still short the yen both in the futures and we would guess in the carry trade. With Japanese rates near nothing for short term money and the Aussie rate as high as 4.5% the trade looked like a sure winner. The collapse of the euro brought a change in global psychology, and those short yen crosses suffered huge losses.
Today there was a featured commentary in Market Watch by Lisa Twaronite touting the long side of the yen. This evening, she claims, the preliminary GDP will show a 5.9% increase on an annualized basis, a lot stronger number than the Q/Q increase if 1.4% my calender shows as the average guess. To achieve the unlikely 5.9% annualized goal, Japanese exports will need to remain very strong. With a strong yen, how likely is this? China takes 19% of Japanese exports, and they are putting the breaks on their economy. The US imports 16% of the Japanese exports, and Europe buy 12%. Continued strong exports to the US and Europe seems like a daunting task even without a higher yen.
There is also the vexing problem of Japanese deficits. Total tax receipts are estimated to be ¥37T (400.3B), more than a little shy of this years spending estimates of about ¥90T, and there is no significant budgetary improvement forecast nest year. Is it any wonder that the IMF yesterday, after a meeting in Tokyo with Japanese officials, said 2011 is the year when the public debt, now 200% of the GNP, and the highest ratio in the world, must be reduced.
The Japanese bulls claim that higher rates are not a big threat for the Japanese government since most of the debt is financed by their own people. Yes the Japanese people have been thrifty super savers but they are also smart enough to see the advantage of a US 10 year note yielding 3.36% rather than a measly 1.30% for their own 10 year paper.
While the preliminary GDP number will be interesting this evening, currently, the only really important numbers are those showing the well being of our trading accounts. How much additional buying of the yen by security seekers is in the wings, we don't know, but we suspect short covering by the specs is reaching a conclusion. We wish to try the long side of the dollar versus the yen in the 91 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.