Here’s Why The Yen Has Slowed Vs. The Dollar

  • September 23, 2004
  • Dave Floyd

Macro
Viewpoint:

The
Japanese yen, often seen as a play on global growth, has slowed its rise versus
the dollar in recent months.  A few things appear to be contributing to this:

 

  • Flows
    into Japanese equities have dried up as the Nikkei has stalled after its’
    recent run up

  • Rising
    rates (widening yield spreads) elsewhere in the world will draw investors away
    from Japan as the BoJ has no plans on rates hikes anytime soon


  • Current account inflows have been more than offset by BoJ intervention over
    the last year

Given the
overall economic scenario for the dollar, absent a revaluation by Asian ex-Japan
currencies, the USD/JPY is likely the pair to least benefit from yen weakness. 
Rather the crosses in EUR/JPY, CHF/JPY and AUD/JPY will show a better
correlation to any yen weakness.  This is not to say USD/JPY will not trade
higher, but the others may be more of a pure play on any yen weakness.

A caveat
to this development could lie with Fannie Mae (FNM).  It is estimated that 20%
of the debt outstanding is held by Japanese investors, repatriation will need to
be monitored closely as well as the ongoing developments regarding the SEC
investigation of FNM’s accounting practices.  Ten-year Treasuries broke 4% on
this concern on Wednesday.
 























 






The
Day Ahead:

EUR/USD: 
firmer, but still wrestling with bear-trend line from Feb ’03, momentum
beginning to slow a bit.

AUD/USD: 
a bit of a squeeze here.  Bear trend line broken from Feb ’03, preferred play: 
long AUD/NZD (we are from 1.0675).

USD/JPY: 
bear trend line from June being tested. Calling breakouts in this pair has been
a coin toss in recent months.  Sizable move higher needed to confirm.

USD/CHF: 
great technical pattern playing out here, a “close” below 1.2570 should set the
stage for 1.2380 initially.

As
always, feel free to send me your comments and questions.


Dave

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