Be Prepared for a Weaker Yen

by Sean Hyman

One of the few financial instruments in the world that was headed to the moon this past year? The yen!

Yeah, the carry trade unwound which caused money to flow away from high yielding currencies and back into low yielding currencies like the yen. Investors became risk adverse with their money. They poured it into things that had been beaten down for years because it seemed to be a safe place to run to. Thus the yen was a huge beneficiary during this ultimate “fear factor”.

However, recently I started talking to you about a possible turn coming in the yen and that the yen party was about to come to an end soon.

Things go from “Bad to Worse” in Japan

Things in Japan have continued to unravel. They’ve experienced a 12 percent slide off in their GDP. The yen has risen 23 percent against the dollar, which is killing their exporters. Toyota (TM), Sony (SNE) and Honda (HMC) are all either doing layoffs or are about to do layoffs. In fact, Honda has even said that if the yen stays at 100 to the dollar or under, that they may be forced to move some of their operations out of Japan. So this is serious stuff!

If that wasn't enough, when the Japanese Finance Minister showed up at the latest G-7 meeting in Rome, he was accused of being drunk and unable to properly participate due to his inability to understand the questions being posed to him.

He was forced to resign just days later, making him one of several finance ministers that Japan has gone through in just a short time. Government instability is never good for a currency. So these were all of the reasons that have surfaced lately as to why the party may be ending for the yen (in particularly against the U.S. dollar).

120 Billion Reasons to Sell Short the Yen and Stop Shorting Other Asian Currencies!

But now there’s a new reason to close out any long positions in the yen and to reverse course by shorting it. Why? Thirteen Asian nations announced on the 22^nd of February that they were forming a $120 billion currency pool in order to defend their currencies.

This will be a powerful alliance as these countries team up together. This should send a building wave of confidence across these Asian countries as they see governments teaming up and banding together for the support of their own currencies.

Japan, China and South Korea will provide about 80 percent of the funds for the pool and the other 10 countries will fund the remainder.

While many of these currencies have weakened significantly and funds may have to be used to buy their currencies, the Japanese could always use any extra resources to sell their strong currency.

With these countries banding together in such a strong, united way, the story may be about to change. In 2008 and up until now, you’ve had most currencies across Asia weakening unduly and the yen having unreasonably high strength.

I think you are going to see this tide turn. These things happen like ships turning and not like speed boats. However, I think the yen is starting its turn even now and it won’t be long before these other Asian currencies start to strengthen once again.

I also think this massive currency pool could help to prevent another 'Asian contagion' as happened in 1997-1998 when many of the Asian countries used almost all of their foreign reserves trying to defend their currencies and had to finally turn to the IMF for help.

It was a horrid problem that ended up causing a ripple effect all around the world. So they are being very preemptive this time around in trying to stop something like this before it gets that far.

USD/JPY “Prepares for Takeoff” on Yen Weakness!

Therefore, I think the sentiment is going to shift away from a strong yen while other currencies finally start to strengthen. You will likely see the yen weaken across the board but I’m most confident in the prospects for the USD/JPY exchange rate going up overall throughout the remainder of the year due to this new vote of confidence and also due to all of the previously noted problems plaguing Japan.

At the end of the year I think you will find that the USD/JPY is back up over 100 and headed higher. This will help Japan’s economy, especially its exporters which are such big household names here in America.

So get ready for more yen weakness and dollar strength against it. Also, it won’t be long before other Asian currencies start to strengthen as the yen starts to weaken.

Comments

[User 143167:]

Don't you think the weakness of JPY is a harbinger of USD weakness too?

Feb 24 04:31 AM

[Conan the B...:]

Great Switch.

The move above 100 may come faster than you alude.

The Japanese GDP numbers are supposed to get weaker. They are intervening, at least that was the conjecture for a recent move. An Industrial base more concentrated than most, they are really hurting. So they are pushing for a weaker Yen after having sat on the sidelines allowing "Market Forces" to govern the Yen's moves.

One question, What are those other Asian Currencies going to strengthen against? The Yen?

Or do you actually believe they will want to erode the Product Pricing advantage they currently have by having their currencies go up against the USD?

Like I said, a great switch.

Feb 24 09:29 AM

[FXedu:]

The other asian currencies have gotten "overly weak" and they are using reserves but now have the ability to use this pool. So they are sending a message to the markets that they want them to have a stronger currency than what they have now.

Yes, they do need to strengthen against the dollar at this point. For right now, both are out of whack...the dollar and these other Asian currencies. The pendulum has swung too far one way, and we should be at the beginning stages of it starting to swing back the other way.

Love the move on the yen through the night and today. USD/JPY and EUR/JPY and other yen crosses have propelled much, much higher on yen weakness. Nice!

USD/JPY has broken its downtrend line and its sideways range all recently...so it could head to 100 fairly quickly now..and possibly as high as 105 or so in the coming weeks to months.


On Feb 24 09:29 AM paultaut wrote:

> Great Switch.
>
> The move above 100 may come faster than you alude.
>
> The Japanese GDP numbers are supposed to get weaker. They are intervening,
> at least that was the conjecture for a recent move. An Industrial
> base more concentrated than most, they are really hurting. So they
> are pushing for a weaker Yen after having sat on the sidelines allowing
> "Market Forces" to govern the Yen's moves.
>
> One question, What are those other Asian Currencies going to strengthen
> against? The Yen?
>
> Or do you actually believe they will want to erode the Product Pricing
> advantage they currently have by having their currencies go up against
> the USD?
>
> Like I said, a great switch.
>

Feb 24 01:01 PM

[FXedu:]

I think the USD will follow JPY's weakness probably not too far off from now. JPY was the strongest on the way up and USD 2nd strongest. Now JPY leading the charge downward...and I think that the USD could turn downward soon too. It has already had a decent pull back but hasn't broken down quite like the yen just yet.

I'm also looking to see if the double top on the daily chart of the USD index holds. That will tell a lot too.

Thank you guys for writing.


On Feb 24 04:31 AM User 143167 wrote:

> Don't you think the weakness of JPY is a harbinger of USD weakness
> too?

Feb 24 01:04 PM

[Conan the B...:]

Go for it, The Yen is definitely your baby, and you are proably right on the other Asian currencies as well.

Any thoughts on the Loonie? I personally believe it has held 78 very well over the last few months.

I just included myWealth in another article, disparaging to a degree, basically because a number of Articles were written about Backwardation and abrubtly dropped without explanation.

Feb 24 01:14 PM

[FXedu:]

If CAD/JPY can clear its sideways range on its daily chart around 79-80, then I'll get bullish on it too. All yen crosses have rallied hard overnight and today...but USD/JPY was the only one that had broken its sideways range and downtrend both. So I am more bullish on it at the moment.

Also, USD/CAD is triangulating up on its daily chart. I'll be interested to see which way it breaks out to see when those two are directly compared, which ends up being the stronger.

Where is the article posted where you made a reference to My Wealth? Just curious.


On Feb 24 01:14 PM paultaut wrote:

> Go for it, The Yen is definitely your baby, and you are proably right
> on the other Asian currencies as well.
>
> Any thoughts on the Loonie? I personally believe it has held 78 very
> well over the last few months.
>
> I just included myWealth in another article, disparaging to a degree,
> basically because a number of Articles were written about Backwardation
> and abrubtly dropped without explanation.

Feb 24 01:39 PM

[Conan the B...:]

I appologize. I made a mistake.

Trace had a few articles on the Subject of Backwardation.

Once gold went into contango, the subject was dropped.

The thing is that I found the Idea to be a useful tool for future use in finding support.

There was no historical backup for the Theory, but in the ongoing search for anything useful, I now use it but not as intended.

Again, My Mistake, I appologize/

Feb 24 06:45 PM

[FXedu:]

Yeah, so far I've never gotten into backwardations and contangos, etc. I understand the concepts but don't consider myself an "expert" by any means in those areas, so I generally don't write that way.

Thanks for the comment though. I appreciate you confirming that I did not say that.

I greatly appreciate you reading my articles. I'm glad you like them.

Feb 25 08:33 AM

[Gavin Wright:]

I totally disagree. Risk is in not being in Yen. Japanese economy may rot but ours is going to rot more ultimately because we are about to print money. Japan is a net creditor nation, we are a net debtor, and the Fed/administration is about to devalue our debt/our currency by printing a whole lot of money. Almost all currencies should depreciate against the Yen - as the USA restructures its debt to lower its debt/income ratio in the economies various sectors - a process that will take time - Obama will also try to raise incomes to pay those debts by printing more money - this will lead to radical devaluation vis-a-vis the Yen, I mean you want to be in currencies that don't have dollar denominated debt, Japanese economy will be horrible but has surpluses and can pull in its assets from overseas which will be supportive to its currency because they will be playing defense - other currencies will depreciate relative to the Yen and probably gold. I'm a little fearful of gold it could easily double here from a us$ perspective but its "real" demand as jewelry etc is at $500 - so this huge speculative stock buildup reminds me of crude oil at $90/barrel then $100 etc to $150/barrel before the crash. Better to be long the Yen.

Mar 17 01:10 AM

[FXedu:]

Look at the USD/JPY rate then...as of that writing....and look at it now. That speaks for itself. USD/JPY pushing 100 again.

Apr 02 08:44 AM