Here’s Why The Yen Is Down…And Why The Pressure May Continue

While the euro held its gains
after the leaked German unemployment data printed as expected with decline
of —42K, the yen continued to suffer through European trading session with
USD/JPY hitting a high of 112.80, coming dangerously close to the 113.00
barrier. Overnight, economic news from the Land of the Rising Sun was
positive with Retail Trade posting 4th straight monthly increase in a row as
sales rose 3.1% on a year over year basis. Auto sales were especially brisk
with a gain of 7.5%.

So why is the yen down? Two possible reasons. Oil prices
are still prohibitively high with NYMEX crude settling above the $59.00
handle yesterday and although Japan has adjusted remarkably well to rising
energy costs, the persistently high level of oil will still impact the
largely industrialized Japanese economy. However, recent the weakness in
the yen has far more to do with political concerns rather than economic
worries. Prime Minister Koizumi is engaged in a protracted battle to
privatize the country’s massive Post Office which holds as much as $1
Trillion in pensioners savings and so far the outcome of the legislation
is far from certain. The vote is scheduled on August 4th or 5th with LDP’
s own members putting the odds at 50-50. Mr. Koizumi has threatened to
call early elections if he loses the vote in the Upper House. Although
Mr. Koizumi is heavily favored to win reelection any political upheaval is
likely to spook the currency market and cause further weakness in the
yen. Further compounding the problem for yen bulls is the matter of
market positioning. Our proprietary Speculator Sentiment Index shows 2.89
yen longs for every dollar short suggesting that there may be more yen
declines in store.

Boris Schlossberg