Here’s Why You Should Watch The Yen Now
- Dollar suffers major sell off against all
currencies but the yen; - Canadian central bank cuts interest rates
25 basis points to 2.5%, citing the strength of the Canadian currency
and its effect on the Canadian economy; - Bank of Japan announced an ease in
monetary policy by providing more currency to the banking system even
at zero interest rates; - The State of the Union will be a
meaningless statement and its importance in an election year is less
than negligible.After last week’s
severe sell-off in the foreign currencies the markets regained their
legs and the dollar was sold off dramatically. The
ostensible reason was the failure of the European finance ministers to
back up last week’s rhetoric with any hint of substantive action. The
egotists of European finance believe that jawboning works and
substantive action is not necessary. The markets will prove this view
wrong and the dollar will not gain strength until the European Central
Bank cuts their interest rates substantially. The policy of the U.S.
Fed and Treasury is for European reflation and until the Europeans act
the U.S. authorities will sit quietly and sing a chorus of ‘let
markets determine value.’ Greenspan himself delivered this view in
Berlin last week and to believe it is not so is foolishness at its
height. The dollar will find levels of support but any strength will
be short lived.^next^
Tomorrow’s edition of the German newspaper
Die Welt will bring an interview with German Deputy Finance
Minister Caio Koch-Weser stating that the dollar’s rapid fall is
indeed problematic for the European economy. He will also state that
the problem is magnified for Europe by some large economies preventing
their currencies from rising thus having Europe carry the water for
everyone. Be careful, as the markets may latch onto this and begin
buying the yen — this is mere supposition at this point, but for you
traders it’s better to be alert than caught by surprise. This article
will be more important because of the upcoming G-7 meeting in early
February. The previous G-7 meeting brought immediate pressure upon the
yen from the other finance ministers but that energy quickly
dissipated and the euro became the focus of market action. Germany is
sensitive to the strength of the euro against the yen so watch to see
if European intervention comes directed at Japan. Be very attentive to
this proposition especially after tomorrow’s story in Die Welt.Tuesday brought changes in the monetary
policy of two central banks. The Canadian central bank cut its
interest rates by 25 basis points in an attempt to weaken the Canadian
dollar but as the market was expecting this action the sell-off was
short lived and the Canadian dollar rallied all day. The Bank of Japan
had greater success, as its Board of Governors voted to increase the
amount of yen in the system in an effort to jump start reflation. This
policy announcement pressured the yen lower as the markets feared that
this would allow the BOJ to intervene against the dollar in a more
aggressive manner. Both banks have set a course for further ease in
overall global liquidity — if the Europeans follow suit the strategy
that might best fit this new drive for reflation will be to be long
the precious metals for that will be the path of least resistance for
macro global investors.As far as the State of the Union address
the emphasis was on doing no harm. The Bush administration considers
itself on a glide path for reelection, and therefore President Bush
did nothing to rock the boat.Yra Harris
yra53@aol.com