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Middle East Discontent Revives the Search for Safety

Civil unrest in the Middle East continues to mount, spreading like an airborne disease.  The naive media applauds the demonstrators, blithely ignorant of the results achieved in the Middle East, historically, by those seeking a change.  The mob may cheer for democracy, but unfortunately a new constitution is not a casual endeavor, and is usually written with blood.  Without a constitution you get one vote, one time to pick who is usually the next tyrant.  

You really need a course in Middle East geography to follow the latest assemblage of malcontents.  Demonstrators have been busy in Yemen, seeking a new regime to replace President Saleh's 32 year rule.  This poor Arab country with a population of 22M, per capita income of $820, and a very unequal distribution of income does have cause for complaints.  But if change in governments is achieved, what is next?

Could chaos in Yemen, strategically located at the entrance to the Red Sea, interfere with the global oil trade?  Why would disruption of the oil trade hurt the USD versus the euro?  The Brent crude to West Texas crude has widened to over $19/Barrel, a sign of concern about Mid-East oil supplies.

There has also been a resurgence in the demand for safe haven currencies.  The Swiss Franc and the yen have benefitted from the renewed interest.  The recent time spent by the CHF versus the USD above the 97 handle was brief, and the USD has recently weakened to around the 95 level.   It remains to be determine if the SF can reach support in the .9340 level.

Recently the yen has weakened versus the USD from 81.11 on Feb 4 to 83.95 this week.  Now the fear of the Mid-East discontent is firming the yen versus the USD, currently trading at 83.20.  Traders have decided that the stodgy but safe Japanese yen might not be such a bad place to park some money.  So far the move has been subdued but there has been a pick up in futures trading at the CME, with the open interest up 12k, or almost 10% in the last two days.

The economic news from Japan this week has not been memorable.  The preliminary Q/Q GDP, and the inflation adjusted Y/Y GDP both showed, as expected, an economy that was contracting.  The Bank of Japan kept the bank rate at .10%, and another report showed a slow but steady economy.  Japanese economic reports next week are unlikely to attract much attention.

Japans' lethargic economy combined with a 2 to 1 debt to GDP ratio, and a rapidly aging population do not seem to favor a strong yen, over the long term.  When the driver is a safe haven, however, the yen may attract some buyers.  Should the yen gain further strength back toward the 82.55 level, we want to buy the USD/JPY, risking 50 pips with a target, a run back close to 84.