Yen, Gold and the Perfect Desert Storm

Gold not so tough against the others

One striking development involving gold is the failure to regain its previous record highs against the robust yen and Aussie. Most importantly this week, gold did reach new highs against the euro, sterling and Swiss franc, yet will ultimately fail to close the week above those highs. The fact that gold was unable to close the week at new highs against these currencies, simultaneously with the unfolding global market sell-off, highlights the importance of gauging the secular momentum of the precious metal beyond in USD terms currency. Therefore, as gold steals the headlines via its performance against USD, it is helpful to scrutinize its performance against more robust assets (currencies) for a truer reflection of its ascent.

While the above analysis does not constitute a negative signal on gold, it sheds light on the preliminary signs of a temporary consolidation even against the greenback. For more details on multi-FX approach to gold's performance, see Chapter 1 of my book Currency Trading & Intermarket Analysis

Oil/EURUSD Ratio Warning Signal

Last week, we used the Oil/EURUSD ratio as a warning signal for oil's eroding ability to maintain its gains with dollar weakness. Since then, the Oil/EURUS Ratio fell to 47 from last week's 52, exposing the speed of the fuel's decline relative to the rise in EUR (and the falling USD). Oil's weakness despite recent USD damage highlighted oil speculators' inability to drive up USD-carry trades, which was no different from US equity indices inability to regain those important retracement levels (10,335 Dow and 1,120 S&P500). And so we concluded that oil would be a major victim at the next bout of risk aversion. Today, oil plummeted by as much as $5/barrel to a 7-week low of $72.50. While we may see a rebound to as high as the 21-day MA of $78, the string of 6 (six) consecutive lower highs on weekly oil remains a solid case for the bears.

Yen's Perfect Desert Storm

The Yen's Perfect Storm escalated overnight amid the combination of unexpected decline in Japanese unemployment and falling global equity futures following the Dubai fallout. FX traders shall be eager to find out how Japanese officials will follow up on their threats to stabilize their soaring currency in the midst of the latest bout of global risk aversion, which was bound to emerge considering equity indices' largely dollar-driven gains. Chances of a successful yen-selling intervention (success = prolonging yen weakness) would largely depend on officials' ability to stabilize falling world bourses, rather than the volumes of actual yen selling. And thus it would be irresponsible to assume that yen-bound FX flows (new speculative yen longs and unwinding of yen shorts) be halted at a time when risk appetite has been violently shaken by a new source of event risk (Dubai fallout rather than the usual suspects of weak US macro, US/UK banks or Eastern European banks).

The yen signals were all here. Readers of this website were flooded with warnings about yen strength here and here as they were reminded of the changing face of the carry trade, whereby the US dollar had replaced the yen as the main funding currency to these trades (courtesy of the Fed's dovish rhetoric), especially after US dollar 3-month LIBOR fell below its JPY counterpart in August, for the first time ever in August. The yen's diminishing role as a funding currency was also a result of the Bank of Japan's announcement to end purchases of corporate debt by year-end. We also constantly reminded readers of yens outperformance against all currencies in each of the last four Fridays.

Can Japan Learn from US How to Weaken its Currency?

Aside from threatening coordinated intervention action (central banks selling the yen), Japanese officials can take a page from the Federal Reserve and resort to fresh liquidity injections. One way would be for the Bank of Japan to reverse last month's decision that it would halt purchasing corporate debt beyond year-end. Markets must also be aware of the emerging rift between the Japanese Ministry of Finance (new political power), criticizing the Bank of Japan (appointed and approved by LDP) and the central bank's rosy forecasts. Thus, Japanese bureaucrats may continue talking down the currency, but as long as the BoJ remains insistent on gradually exiting its strategy of emergency liquidity measures and issuing brighter economic outlook, yen downside would remain limited -- especially if the Dubai Debt fallout is accelerated in world bourse via year-end profit-taking.

See yesterday's chart analysis drawing attention to the DIA's relationship with the Shanghai Composite Index, and how losses in the latter will inevitably pave the way for the required retracement in the DJIA. Eventually, Shanghai went on to lose 2.4% on Friday and the Dow to lose 1.3%. The Shanghai's outside bearish week suggests more losses next week.

Comments

[D. McHattie]

It's an interesting characterization: failure.

You use the word a few times even though gold is just shy of its nominal all-time highs even against currencies that are rising.

If you hold gold and bought it prior to this past week you're still in pretty good shape despite a significant drop today.

2009 Nov 27 02:19 PM

[bob adamson]

As the post October of 2008 period lengthens the threat of currency speculation and competitive devaluation will grow. So far this has been kept well in check given the global economic environment but serious consideration should be given for the G20 to organize and convene a modern version of the Bretton Woods conference.

Understandably there is reluctance on the part of the US, China and some other major interested parties to the triggering of the convening of such a conference because there is currently little consensus on what direction the conference should take and, for each of these players, the failure of such a conference or some of the options that might be adopted at such a conference would pose significant challenges. That said, careful preparation to lay the groundwork to hold such a conference if such a conference becomes necessary to forestall international monetary chaos from breaking out should be occurring quietly in the background among the key nations.

2009 Nov 27 02:20 PM

[willydo]

Why is the yen high? Maybe someone could explain it to me. Today, these is an article saying that Japan is the ONE country to totally avoid (stock mkt) in the opinion of the writer. Also, the CDS has spiked recently amid concerns of Japan's huge debt. It it the highest of the rich countries and something like 145% (?) of their GDP. Their economy is going down (exporters hit by high yen) and their market is about 2% lower than it was at the beginning of this year unlike almost every other country that has had a nice run up in the markets.
So why is the yen so high not just against the $ but others as well???
Thanks,
Willydo

2009 Nov 27 03:29 PM

[Jason Rines (iThinkBig)]

Their is no consensus on what would replace the existing monetary framework of Bretton Woods. I am not talking about replacement of the reserve currency, that is now obvious as to where it is heading...

The solution of an evolved monetary framework takes time and must include serious debate from a lot of conflicting interests. The global public at large has no say in the matters this time around? It should or a lot less participation in the supply chain will be the result.


On Nov 27 02:20 PM bob adamson wrote:

> As the post October of 2008 period lengthens the threat of currency
> speculation and competitive devaluation will grow. So far this has
> been kept well in check given the global economic environment but
> serious consideration should be given for the G20 to organize and
> convene a modern version of the Bretton Woods conference.
>
> Understandably there is reluctance on the part of the US, China and
> some other major interested parties to the triggering of the convening
> of such a conference because there is currently little consensus
> on what direction the conference should take and, for each of these
> players, the failure of such a conference or some of the options
> that might be adopted at such a conference would pose significant
> challenges. That said, careful preparation to lay the groundwork
> to hold such a conference if such a conference becomes necessary
> to forestall international monetary chaos from breaking out should
> be occurring quietly in the background among the key nations.

2009 Nov 27 03:40 PM

[Perry Sadorsky]

Trading volume in N.A. was light today and it won't be until next week before we can get a better read on the bucks for bullion and barrels trade.

2009 Nov 27 04:09 PM

[bob adamson]

willydo -

In response to your question about Japan, the attached article posted today at the web site of "The Economist" will be of interest to you I think.

economist.com/busi...

bob adamson


On Nov 27 03:29 PM willydo wrote:

> Why is the yen high? Maybe someone could explain it to me. Today,
> these is an article saying that Japan is the ONE country to totally
> avoid (stock mkt) in the opinion of the writer. Also, the CDS has
> spiked recently amid concerns of Japan's huge debt. It it the highest
> of the rich countries and something like 145% (?) of their GDP. Their
> economy is going down (exporters hit by high yen) and their market
> is about 2% lower than it was at the beginning of this year unlike
> almost every other country that has had a nice run up in the markets.
>
> So why is the yen so high not just against the $ but others as well???
>
> Thanks,
> Willydo

2009 Nov 27 04:12 PM

[phdinsuntanning]

BOJ is improving its position
not buying any risky paper,
less yens = strong currency.
Former bosses still own
the exporter industries,
and now they can play the
game of making Japanese
labor cheap with devaluation.
A strong yen is always good
for the population, cheaper
imports more domestic happines
and the private sector has the
saving to enjoy it without
begging the trading partner
to cover the private deficit.
Japan government tighting
belt and not building more
bridges to the sea, or loans
for the friends and industry
cousins. Japan will find its
new way with low domestic
prices cheap commodities
measured in yen: reserves will
go down to manageable
levels. That is why they won
the elections, now is just
delivery, jap auto industry
is history and domestic
demand will flourish.

They where not elected to
devaluate anything but the
corruption and favor. A more
competitive Japan will never
give loan to build feverish
castles in the desert.

2009 Nov 27 04:47 PM

[tripleblack]

Yen has been UNDERvalued for decades. What we see now is something close to where it should be, though I suspect it will continue to strengthen for a while yet.

The Chinese yuan will eventually start along the same path, though for very different reasons.

Japan is, I think, seeking to emulate the path taken earlier by many european countries.

2009 Nov 27 05:12 PM

[doubleguns]

Japanese TV had an article tonight on all of the Japanese citizens buying dollars. Maybe they see the yen turning around against the dollar.

2009 Nov 27 07:03 PM

[willydo]

Thanks Bob.....

www.economist.com/busi...

I read this article and it does seem to explain a bit about why the yen is rising even though just about everything else about Japan is negative. Lucky those citizens keep buying their own country's debt.
Willydo

2009 Nov 27 08:06 PM

[Moon Kil Woong]

I have a suggestion, perhaps Dubai World should apply to be a US bank holding company. I hear that after you do that it doesn't matter how poorly you do. You can just throw away your cash flow statement.

And perhaps the BoJ should hire Hank Paulson and Greenspan. I'm sure that will put a damper on their currency values without having to lift a finger. If that fails to drop the Yen just elect George Bush Jr.

2009 Nov 27 10:13 PM

[hock]

Recent sharp Yen strength is likely due to unwinding of long Aussie, Gold, Kiwi, Oil positions against short Yen. As losses mounted, margins are triggered. Indecisive Japanese policy makers with regard to FX intervention is another short-term contributive factor to Yen strength given the circumstances. Logically, the Yen should be among the weakest currencies because it is the only major nation in real deflation. Therefore strategically, for long-term positioning one should be looking to sell Yen and buy Asian currencies like the Korean Won, Sing$, etc. But expect some short-term pain because of current momentum. Small, non-leveraged positions are advisable.

2009 Nov 27 10:38 PM

[annepiano]

On Nov 27 09:50 PM mincjsa wrote: "> sorry to disturb u. just take u a little time........"


This is mincjsas' spam post ( # 58) advertising knockoff wares. It is becoming annoying.

I feel like I am in the perfect storm, aboard the Titanic. Some knucklehead is trying to sell me a fake Prada handbag, as we are sinking !

Cannot the administrators block this idiot's spam ?

2009 Nov 27 11:40 PM

[ManAboutDallas]

Alas, Ms. Piano, while the trivial answer is "yes, they can" the brutal reality is that, as you may have noticed, the Internet is the quintessential definition of asymmetric warfare, i.e. there is no effective defence against any sort of organised offence when the offence can be mounted cost-free, or nearly so.

Stopping the spammers is, to expand on your analogy, akin to trying to bail the Titanic. And the Band played on.


On Nov 27 11:40 PM annepiano wrote:

> Cannot the administrators block this idiot's spam ?

2009 Nov 28 12:05 AM

[Thomas George]

In the past 3 months, Aussie dollar is up about 5% versus the Euro and Japanese Yen. During the same period, it is up 10-12% versus the dollar. [These numbers are from a cursory glance on the Yahoo finance website.]

Since gold is priced primarily in USD, its price in other currencies will follow the currency conversion rates. Since the USD has fallen against all major currencies in the last 3 months, it is not surprising that gold does not show the same gain in other currencies.

2009 Nov 28 12:28 AM

[The EconomicJoker]

Yeah they can block spammers. Just block any article with gucci in it. Simple filtering software

2009 Nov 28 12:39 AM

[The Recusant]

The battle of dollar versus gold is just beginning. Both are conceived as safe havens and panicked fund managers scramble to invest in the tried and familiar, so dollars currently are winning during the immediate Dubai default and Yen crisis. But for the long run the central banks are buying more and more gold and dumping their dollars, and soon the fund managers and retail investors will follow with the dollar sliding downward and gold ultimately rising to new heights. Patience is more than a virtue, it is holding gold and protecting your wealth.

2009 Nov 28 01:01 AM

[Djvu]

great post!
any charts on Gold`s peak levels that portend an Equity crash ? as typically high gold prices indicate rising unseen risks, just like we have seen last year before subprime collapse.

2009 Nov 28 01:36 AM

[PassioneL.Com]

This article really is informative - current situation is totally mind boggling , stocks price down globally .

what comes next ? where should all park their cash ? into property and Oil perhaps - gold is way too high now , it be a decade more beofer gold gona Hit $2000 usd - Ain;t a Gold bug here


PASSiONEL.COM

2009 Nov 28 02:32 AM

[Dave Wrixon]

You guys live in some kind of a dream World. Bretton Woods died 38 years ago!

en.wikipedia.org/wiki/...

"The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value—plus or minus one percent—in terms of gold and the ability of the IMF to bridge temporary imbalances of payments. In the face of increasing financial strain, the system collapsed in 1971, after the United States unilaterally terminated convertibility of the dollars to gold."


On Nov 27 03:40 PM Jason Rines (iThinkBig) wrote:

> Their is no consensus on what would replace the existing monetary
> framework of Bretton Woods. I am not talking about replacement of
> the reserve currency, that is now obvious as to where it is heading...
>
>
> The solution of an evolved monetary framework takes time and must
> include serious debate from a lot of conflicting interests. The
> global public at large has no say in the matters this time around?
> It should or a lot less participation in the supply chain will be
> the result.

2009 Nov 28 07:34 AM