USD vs. YEN: Race to the Bottom

 |  Includes: DBV, FXY, JYF, JYN, UDN, UUP, YCL, YCS
by: Jose C. Ramirez
In the arena of currency exchange, there is a fairly important condition emerging inside the larger context of USD devaluation.
The USD has touched a 15 year low against the YEN. The chart below shows data as far back as 1992.
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In April 1995, the USD makes an initial low against the yen.
A Little Rate History
On the backdrop of easing monetary policy, rates moved lower starting February 24, 1989 at a Fed Funds rate of 9¾% to as low as 3% in September 1992. From 1994 to 1995, Fed Fund rates fluctuated from 3% to 6% and rates remained relatively stable at 4% to 6% until the January of 2000.

The Bank of Japan (BOJ) in contrast, during the same period, moved their operational short term interest rates peaked at 6% in August of 1990, held there through June of 1991 before moving down to as low as 1.75% in 1993 where it remained until March of 1995. In April of 1995, BOJ had rates set at 1%.
BOJ and Federal Reserve Intervention
The BOJ has a rich and deep history of currency intervention. On the month prior to the April 1995 low, the BOJ intervened in the currency market in which the Yen appreciated dramatically against the USD. It appears that the initial intervention was a sterilized move, in which the BOJ sold bonds to domestic investors removing money from the domestic market and used those funds to purchase USD, and strengthened the Yen in the process [1].
It’s not clear whether this was a result of ineptitude or deception1, but the former would explain the need for Federal Reserve to participate in another round of intervention, with the BOJ, in April shortly after, in order to reverse the unwanted appreciation, and send the Yen onto the correct trend against the dollar and making the USD/YEN cross appreciate.[2] The reversal is obvious in the chart above.
Fast forward to today, and both the Federal Reserve and the BOJ have rates set at 0%.
Today, we have a situation in which both central banks are dedicating to fighting deflation. What’s different today is that in 1995, the Federal Reserve was complicit in letting the Yen drop against the USD. The question is, is the Fed complicit today? Or, do we have a"‘Race to the Bottom" in which both central banks are racing to devalue against other major currencies? All the obvious joking aside, and I know I for one have an extreme cynical view on this subject, but I do think the Fed remains complicit in this idea that the Yen deserves the bottom rung position in regards to fiat currency of major economic powers.
To be completely committed to the idea that the Fed is trying to destroy the dollar, (completely that is), one would also believe that the policy makers at the top are revising the role of the United States in geopolitics altogether. Let’s be honest here, if the dollar collapses, US influence declines substantially. Do people rationally think that this is the objective of dollar devaluation? Either we have a misinterpretation of the objective, or complete ineptitude.
A counter argument to the idea that the Fed is trying to destroy dollar buying power, is that the Fed is violently committed in "helping" the Chinese government realize the benefits of an appreciating Yuan. In fact, I think if we could academically remove the financial shock of the last five years, this has been a long term goal of the Fed when you examine the totality of the statements made by Treasury Secretaries Henry Paulson and Timothy Geithner over the last decade in regards to U.S. Dollar/Yuan exchange rates. The latest recession conveniently provides cover for the long-term objective of leading China into greater domestic consumption.
The chart below outlines the intersection of 2 trends in the USD/YEN cross, which again, is at a 15 year low. The USD/YEN is in a short term pennant pattern, in a long term bearish trend line. This is a bearish pattern in totality.
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What does this mean? It means the momentum is down, the prospects are ugly for the USD, but one could make a case that the BOJ and the Fed will intervene, eventually. For the time being, I think there is no major change between these 2 currencies until lets say, about July, when the bear trend intersects with the pennant formation, and things begin to break down, and decisions have to be made. It may also be that, in the summer, the Fed may change to a hawkish inflation tone. This provide much needed dollar support.
[1] Werner, Richard A. Princess of the Yen : Japan’s central bankers and the transformation of the economy. Armonk, NY. East Gate, 2003 p. 121, 123
Disclosure: I am long PCLN, QCOM, SLV. I am short DZZ, EXPE, NVDA, UUP