Wednesday, 18 September 2013

Yen Surfs Summers End

Ralph Shell, Excel Analyst

Prior to last weekend's withdrawal by Larry Summers of his nomination for the US Fed, it appeared there was sufficient selling in the yen to revisit the 101 handle, at least.

When the controversial Larry Summers requested his name be removed from consideration as replacement for Bernanke's, it was a surprise to me that this would prove to be yen-friendly.

Yes, there might be some testy items during the confirmation hearings.  Some examples might be: he worked for large banks, and then opposed derivatives' regulations; worked for repeal of the Glass-Steagall Act (four provisions of the U.S. Banking Act of 1933 that limited commercial bank securities activities and affiliations between commercial banks and securities firms); as Harvard President, he managed the endowment fund and lost billions trading derivatives, and other assets; and expressed a view that females did not do as well in math and science as males.  Finally, in the Clinton Administration, he worked as a de-regulator and now he would be called upon to work in an administration that favors regulations.   

But were these Summers' background items really reasons for the bullish yen run?  Perhaps the COT Report, which showed in the latest report the specs were short over 130K contracts, was a more likely reason.  Sometimes when the market gets overloaded, and there is no fresh selling or buying, the market goes the other direction in the short term.

Longer-term, the Japanese economy would seem to be confronted with a myriad of problems.  On Thursday, we get a new report on the Japanese trade deficit.  This is expected to show the 14th consecutive trade deficit, a record going back to 1979-1980. 

Click to Enlarge USDJPY Forex Weekly Chart
USDJPY Weekly 17 September 2013, Excel Markets Analysis

So far this year, there has been a 15% decline in the value of the currency, which has so far failed to produce an increase an increase in exports which is needed to turn the trade deficit around.

"I cannot tell when the trade deficit will end," said Norio Miyagawa, a senior economist at Mizuho Securities Research & Consulting Co. "What's worrying more is that Japan's export competitiveness may be waning."

Click to Enlarge USDJPY Daily Forex Chart
USDJPY Daily 17 September 2013, Excel Markets Analysis

Compounding the situation has been the extremely hot temperatures that have continued even through September which have added to the cost of imported fuel into Japan. The situation will get worse now that Japan's only working nuclear reactor went offline Sunday night for a regular checkup, possibly requiring importation of additional fuels, including expensive additional liquid natural gas.

The Summers rally in the yen may continue for a while longer but we are inclined to stay short the yen versus the USD.  As always mind your money.
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