Where are these currencies headed, and how do you earn off them?
Why these rates have to move
The yen is going to strengthen massively, we reckon from 116 now to about 100 within three months. Reason: the US market is headed for an October crash,and that implies that there is going to be plenty of blood on the streets as regards yen carry trades. They will get unwound, so people who previously sold yen and bought higher-yielding assets on margin will find their bankers calling them to cover yen positions. In our piece of 7th July we suggested continuing with the yen carry trade; now we suggest that you get out of the yen carry trade.
In wobbly years, October has been a favorite "crash" month. We fear the same for this October. We believe that the sub-prime mess is going to worsen, what with so many German banks now also being yanked around, in particular the Landesbanken.
But, to stay with Germany: "Wunschdenken" means "wishful thinking", and this is exactly what the "de-coupling" school is all about, namely that when America's stock market tumbles, all of that money will flock to Asia's healthier stock markets.
No, no, and no! Look at how US wheezes have jolted our markets out here over the past days!
Our guess is that when America tumbles, you will find international funds selling US stocks and then piling into safer and higher yielding Euro deposits. Of course, at present, the USD offers higher rates, but I maintain that the Euro's tightening cycle will be longer than America's, and people will discount this.
This puts the Euro at US$1.50/Euro by this October, versus its current $1.36.
How to Make Money Off This Idea
Using these intuitive forecasts, we believe that by October -
• the yen will climb b y 15% against the dollar
• the Euro will climb by 10% against the dollar, and thus
• the yen will climb by 5% against the Euro
If you buy into our scenario, then on a sector basis, sell/short Japanese and European exporters.