Can anyone stop the appreciation in the yen? Not the Bank of Japan or the country’s government it appears
Talk about a no-win situation: Japan’s central bank is damned if it doesn’t intervene to weaken the yen and quite possibly double-damned if it does.
The Japanese yen climbed yesterday, August 31, to 83.92 to the U.S. dollar. That’s near the 15-year high for the Japanese currency. At recent prices Japan’s exporters are getting killed. Growth in Japanese exports slowed in July for a fifth straight month. As you’d expect shares of Japanese exporters led the Nikkei 225 down again. Toyota Motor (TM), for example, fell 2.4% for the day. Canon (CAJ) dropped by 4.5%. The Nikkei declined to 8824, a 16-month low.
The Bank of Japan and the Ministry of Finance have tried talking the yen down to no avail. They’ve announced a new stimulus package and extended a cheap-loan program. And the political pressure for the bank to do more has intensified.
It’s clear what the bank could do. It could sell yen into the market. In theory that extra supply of yen would drive down the price of the Japanese currency.
Trouble in Japan and the U.K. add up to a stronger U.S. dollar
Expect the dollar to keep moving higher in the near term.
Credit rating worries in Japan and disappointing economic numbers in the United Kingdom pretty much guarantee that the U.S. dollar will continue to gain on the yen and the pound.
On January 25 Standard & Poor’s lowered its credit outlook on Japan’s AA-rated sovereign debt to “negative” from “stable.” Japan’s government doesn’t have a plan to cut its budget deficits, S&P said. The cost of protecting against a default on Japanese government debt within the next five years in the derivatives market rose by 0.05 percentage points to 0.9 percentage points.
The long-term worry is that Japan’s aging population and stagnating economy will eat into one of the world’s largest pools of savings. Domestic Japanese investors hold 90% of the country’s debt.
And now for something shocking: The dollar and stocks start to move up in tandem
I’m seeing the first signs of a new relationship between stocks and the U.S. dollar.
Ever since Lehman Bros went into bankruptcy in the fall of 2008, the dollar and stocks have been negatively connected. When the dollar went up, stocks went down, as investors saw any hint of risk as a reason to sell stocks and buy dollars (and dollar-denominated Treasuries). When the dollar went down, stocks went up, as investors decided that risk had receded enough so they could buy stocks again (and sold dollars and dollar-denominated Treasuries to do so.)
For the last two months, however, the negative connection has been getting weaker and weaker with commodities and stocks, on the one hand, and the U.S. dollar, on the other, moving in the same direction.
So far in December, the negative connection has come apart completely, according to Bloomberg. Since December 1, the Dollar Index, which tracks the performance of the U.S. dollar against the euro, yen, pound, Canadian dollar, Swiss franc, and Swedish krona, has moved in sync with stocks on more than half of all trading days. For the first 11 months of the year the U.S. dollar and stocks moved in opposite directions on seven out of every 10 days.
The dollar and commodities have also moved in tandem recently. The Reuters/Jefferies CRB Index of commodities is up 2.1% from the end of October through December 18, Bloomberg reports. During that same period the U.S. dollar is up 1.8%.
The reason for the shift, I’d speculate, is a change in the way that investors view the U.S. economy in both absolute and relative terms.
A rising dollar stalls all boats (so far)
The rising dollar (and the falling euro and yen) has been enough to stall the emerging economy stock markets that have outperformed the U.S. Standard & Poor’s 500 stock index since this huge rally began on March 9.
The “stall” is just that. Emerging economy stock market indexes have simply stopped moving up. They certainly haven’t yet tumbled enough to present opportunistic investors with a lot of bargain buys.
But considering the degree of out-performance since March 9—the iShares MSCI Emerging Markets Index ETF (EEM) was up 100.3% from March 9 as of the close on December 16 versus a mere 56.2% gain for the S&P 500 during that period—even a stall is a significant change.
The yen looks headed to replacing the dollar as the world’s weak currency of choice
Trying to figure out whether the dollar is headed up or down over the next six months?
That’s not exactly a purely academic exercise since a rising dollar has been linked lately to falling stock and commodity prices and a falling dollar has corresponded to rallies in stock and commodity prices.
Right now it looks like direction of the dollar—in that six month time period anyway—hangs on the relative performances of the U.S. and Japanese economies.
For the dollar to rally the U.S. economy doesn’t have to be the strongest in the world. It just needs to be stronger than the Japanese economy. And, frankly, that looks like a bet you can take to the bank for the first half of 2010.
The U.S. economy is projected to grow by 2.6% in 2010, according to a Bloomberg survey of 82 economists. That’s roughly twice as fast as this group predicts for the Japanese economy. (And in my opinion, these economists are being very optimistic if they think Japan is going to hit 1.3% growth in 2010. The Bank of Japan and the Japanese government are both launching new stimulus programs designed to keep the country from falling back into deflation.)
The difference between U.S. and Japanese growth rates is so important because it controls which currency funds the carry trade.
