Step Aside British Pound, Japanese Yen Returns As Safety Currency Of Choice

May.20.12 | About: CurrencyShares Japanese (FXY)

I have written about my skepticism regarding the British pound's newly found "safe haven" status (for example, see "Hard Currency: My Reactions To The Financial Times' Promising Podcast"). During my last post, I forgot to point out that the British pound declined versus the U.S. dollar (NYSEARCA:FXB) for the entire month of May while the euro crisis heated up. This decline has currently taken a pause right at the support of the 20-day moving average (DMA), but I doubt this reprieve will last long.

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The ascendancy of the British pound against the U.S. dollar ended this month in dramatic fashionClick to enlarge

The ascendancy of the British pound against the U.S. dollar ended this month in dramatic fashion

In fact, the U.S. dollar index (NYSEARCA:UUP) has enjoyed a sharp recovery in May, breaking its recent downtrend and challenging highs last seen in January. Overall, the dollar has experienced a robust 10% bounce from the lows of 2011.

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The dollar index restarts its surgeClick to enlarge

The dollar index restarts its surge

Relative economic strength in the U.S. has been part of the dollar story. I am assuming the recent surge in U.S. government debt is at least partially responsible for helping the dollar to surge this month. The iShares Barclays 20+ Year Treasury Bond (NYSEARCA:TLT) is now higher than it was during the worst phases of the 2008/2009 financial panics. TLT also achieved a higher weekly close than it did during 2011′s rush for U.S. debt.

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The rush for government debt is in full force againClick to enlarge

The rush for government debt is in full force again

Overall, the biggest story is the resurgence of the Japanese yen. Yen buyers are back in full force. The yen weakened for almost two months earlier this year as it seemed Japanese monetary authorities had finally started to scare away the stubborn buyers of yen. Even against the U.S. dollar (NYSEARCA:FXY), the Japanese yen has broken the psychologically important 80 level in a trend that first began in March. The 200 DMA is now in view as the next critical support level.

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The Japanese yen is BACK!Click to enlarge

The Japanese yen is BACK!

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The plunge in USD/JPY was exacerbated on Thursday, May 17 by a very disappointing Philly Fed (Philadelphia Federal Reserve Business Outlook) report. Manufacturing activity in the Philadelphia region contracted this month for the first time since September 2011. The broad based gains in the yen against all major currencies confirmed the return of the Japanese yen as the perceived "safe haven" currency.

Last week was a tough week, and I experienced two steps back. Correlations and relationships that I had played well for weeks broke down all at once. In particular, the pound began to decline as fast, and sometimes faster, than the Australian dollar. Fortunately, I am not nearly as big as JPMorgan Chase (NYSE:JPM), and I can turn on a dime as needed when assumptions break down. I have repositioned for the next three steps forward by going net long the yen and net short the euro. I expect to reposition much more rapidly in the weeks ahead.

Be careful out there!

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in FXY over the next 72 hours.

Additional disclosure: In foreign exchange, I am net long yen and the U.S. dollar, net short euro.