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Japanese Yen Again Appreciates as Turbulence and Chaos Plagues the Arab World [Click to edit]

The USD is getting knocked around again today, as the chaos in the Mid-East continues, threatening to wreck the global economic recovery because of high energy prices.  Part of the problem in the US, which threatens the USD, is an energy policy that discourages US production.  One aspect of this policy was revealed in an editorial by Steve Forbes in the today, who said:

"By freezing U.S. energy assets in the Gulf and keeping 97 percent of our offshore oil and gas off limits, our government, willing or not, is fueling an energy crisis that could bring this nation to its knees. Continued inaction in the Gulf threatens to force us to import an extra 88 million barrels of oil per year by 2016, at a cost of $8 billion.

One-third of the oil used in the U.S. is from the Gulf of Mexico. As oil spirals past $100 per barrel, handcuffing these domestic energy reserves only deepens our dependence on hostile oil-rich nations abroad."

Read more:

While Washington dreamily focuses upon alternative fuels that are going to propel our cars, trucks, airplanes, as well as heat our homes and shopping centers in one or two decades down the road, the USD and Main Street America are currently losers.

The energy story, however, is merely an addendum to speculators bearish perception of the USD.  In the currency futures markets the net short USD position has been in the vicinity of 300K contracts, and the increase in this week's open interest suggests the money flow is still coming in, and probably adding to the short USD position.  While the aggregate net USD short is huge, specs prefer the short side of the yen versus the USD.   Their total yen short was 41,479 contracts in the last report.

Recent yen strength probably has the yen bears befuddled.  Debt to GDP ratio in Japan, over 200% is among the highest in the world.  They continue to use borrowed money to pay for close to half of their current expenditures.  Their economic recovery is weak, perhaps tenuous should the global economies stall.  Although the unemployment rate is low at 4.9%,  the number of Japanese households on welfare hit a record high of 1.44 million in December.

The current Japanese leadership appears weak. They seem indecisive about even simple problems.  For example, the Japanese have been providing foreign aid for China since the late 1970's, but with the Chinese economy overtaking the Japanese economy, why even debate the continuation of this give away?   As John Mauldin, a prominent analyst says, the Japanese economy is like a bug looking for a windshield.

The USD has weakened against the yen this week, putting the yen bears on the defensive.  So far they are only minor losers as the pair continues to find support in the 81.60 area.  Since there are some yen shorts with losing positions, we wonder if there might not be some capitulation that might feed on itself, should some down side momentum develop.  We are inclined to have some scale orders to buy the USD/JPY in the 81. to 81.30 area.  This is not a fast mover but it does not cost much to roll over and a return to the 82.40 levels seems like a reasonable target.

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Japanese Yen Again Appreciates as Turbulence and Chaos Plagues the Arab World