Japanese Yen weakness promises rosy future for ailing economy

In the last week there have been some positive signs from Japan. The Liberal Democratic Party (LDP) has been able to form a government, in the process resulting in Shinzo Abe being able to launch a new policy direction. His direction is very good, because it offers business some concessions, a loosening of monetary policy, to offer exporters a more competitive exchange rate, as well as funding for the rebuilding of the Tohoku area. The devil of course will be in the detail, however the signs look good.
Understandably the exchange rate has weakened. This should be enormously stimulatory for the country, and I suspect it will be sustained by the strength of the Asian region. This might well be the lead the market needs in terms of dragging the globe out of this slump. Japan needs to rebuild real incomes, and that will come from exports to Asia as well as deregulation of the high-cost Japanese economy. Japan has no choice. The people are already killing themselves with work. They need a lower cost environment. The concessions so far have come from workers in the form of outsourcing, contracted labour agreements which mean many workers are easily fired. This is not to ignore the fact that Japan retains high cost 'life of employment' workers in the large companies. That culture will need to change. We can look forward to a dynamic Japanese economy. Historically transformations have been rapid. Remember that Japan is the compliant society; so expect people to fall into line. Few cultures have such acceptance of personal hardship; so much tolerance for austerity than Japan. It will happen again. I would be expecting to happen quickly, as it did in the Meiji and post-WWII era. One needs only look at the discipline of the Japanese homeless people.

The Yen has alread weakened somewhat; but as is apparent, this is a medium term exit point as Y90 is an important resistance point....as you can see from the chart. You might expect a resumption of Yen strength to Y84 in the coming weak, as traders take profits. The evidence still needs to fall on the table.
USD-JPY EXCHANGE RATE - as at 22nd Jan 2013.

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

USD-JPY set to weaken

The current chart for the USD-JPY is strongly suggesting a fall in the USD back to 80yen. The USD has struggled to break out of the current trend, and we expect it to fall back to that support. This is the short term price action, though we do believe that the medium term outlook for the USD is stronger than for the JPY. The Democratic Party of Japan (DPJ) has allowed its fiscal reform opportunity to slip away with in-fighting over leadership. It is therefore expected that any sign of reform is at least a year away; perhaps under a new prime minister and some reinvention of the LDP.

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Andrew Sheldon www.sheldonthinks.com

Australian dollar set to recover

The Australian dollar can be expected to recover in the next week, holding out above $1.00 parity with the USD. The principal reason I think will be a weaker USD based on the cross-rates. The USD has recovered against the Yen, but it will quickly wither, and test previous low.

The Euro also looks set to strengthen against the USD, though I'd stick with the hard currencies, not the pretend (main) ones.

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Andrew Sheldon www.sheldonthinks.com

ECB repudiated by British representative

This is an interesting excerpt from the last meeting of the European Central Bank, where the British representative Nigel Farrage MEP gave a stinging rebuke to the ECB model. I am curious though....how exactly does he think the 'markets are going to deliver justice to these central bankers when the Japanese and Americans are only too pleased to debase their currency in the pursuit of moral relativism or moral scepticism, depending on your 'relativist' apathy. He is a politician....supposedly a 'moral agent', so where was he over the last 10 years when the ECB, Fed and Bank of England were enabling their governments to blow out their tax-payer funded hides. What a hypocrite!

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Andrew Sheldon www.sheldonthinks.com

EUR and JPY weakness to outpace USD debasement

I actually expect the debasement of the EUR and Japanese Yen to outpace the USD debasement, so we can expect a relatively strong USD. All these currencies will of course be weak against the commodity currencies and emerging markets. See my article about the Fed and Asian property.

The interesting aspect is the impact on the commodity producing countries like Australia, Canada, South Africa, Chile, Brazil; as well as the emerging markets like China, Korea, Thailand, Indonesia and the Philippines.

We can expect these countries to be strong. It is interesting of course because the Fed and EU are blaming the Chinese for the strong Yuan; but partially the reason for the strong Yuan is that the US and European Central Bank (ECB) are debasing their currencies. True, the Chinese are funding the US deficits, and that has artificially raised the USD, but that is with the support of the US government.

We might well expect emerging markets to survive this currency crisis fine this time; largely I think because they can expect a lot of property investment by Western fund managers. Expect a property boom in Asia, particularly the Philippines, China, Vietnam and Thailand. Small Western players are better off in the Philippines because of favourable language (i.e. English), familiar legal system, generous visa rules, and good yields of 8% on high-end apartments.

So what about the commodity producing countries? Australia, NZ, Canada, Brazil and Argentina rely greatly on commodity exports. The problem of course is that mineral commodities do not price at parity with agricultural commodities. This is has to result in these countries sabotaging their currencies with debasement, or more likely we can expect the stronger foodstuff prices to continue. This development makes investment in countries like the Philippines more attractive, or other countries which might have cheaper agricultural land. I know the Philippines does have marginal land as cheap as PHP10-20/m2 (USD0.20/metre2), however you could probably do better elsewhere. Certain higher value crops like coffee are better in the Philippines. Nestle certainly produces a lot. Some of the mountain provinces are also suitable to growing more temperature foodstuffs. e.g. Baguio City is a food basket for the Philippines. It is one of the few cities with malls in the cool mountains...aside from Tagaytay, south of Manila. Anyway, the Philippines is a distraction from the currency strength that is gripping these commodity and emerging markets. So expect stronger commodities as the central banks debase currencies with more 'quantitative easing'.

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Andrew Sheldon www.sheldonthinks.com

The Yen set to fall against the Philippines peso

Whilst I am looking at exchange rate action, its noteworthy for Japanese people and Western expats living in Japan that they ought to consider buying property in the Philippines. Why? Well...the Yen is about to fall, so it would be a good idea to remit money before the currency collapses. Property yields in Japan are about 12-13% now, compared to 8% in the Philippines. The difference however is that Philippines population growth is 2% per annum, whilst Japan's is negative, and does little better than 1.5% in certain districts of the major cities.

The Philippines is attracting a lot of investment from Taiwan, China and Korea in tourism, and also a lot of business from US, Australian and NZ call centres. Aside from that, it also has a healthy exposure to expat remittances and domestic commodity production. In recent years the Philippines has been growing at 7-8%, and there is no reason why that will not be sustained.

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Andrew Sheldon www.sheldonthinks.com

The AUD play with a Japanese property twist

The AUD-JPY is not a currency I have been giving much attention to of late because my focus has been on the commodities (AUD-USD) rather than property. Though since I have an interest in Japanese (foreclosed) property, I was interested to look at the implications for the property market....which is offering yields of 12-13%.

We can see from the chart that the AUD might be strong against the USD, but against the Yen, the AUD has actually been a bit lacklustre. That is about to change. The Japanese yen is going to come under a bit of pressure as the govt there debases its currency. You can expect this to lead to a strong AUD against the yen. In fact I am expecting the AUD to rise to the previous high of Y107. This is a good long term currency trade, as you will never earn more spread interest than on this trade. With the unemployment rate 5.1% in Australia, there is actually scope for more rate increases as well. Stimulus in the Eurozone and Japan can only help Australian commodities demand.

The implication is that there is a good opportunity to trade AUD-JPY and then use your profits to buy a holiday house in Japan. Don't forget to get your Japan Rail Pass! God, I should be selling the things...I'd told so many people about them. I love trains. :) I take GPS coordinates for every station I stop at. That's right...I don't have a life. Glad you could join me though.

NZ Property Guide Philippine Real Estate Guide Japan Foreclosed Guide

Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Currency market realignment coming - JPY:USD

Just as we are going to see a turnaround in the EUR, we can also expect a turnaround in the USD against the Yen. Japan has been complaining of late about its reduced export competitiveness. Of course this is just justification for printing Yen to repay the debt which is denominated in Yen. i.e. The Japanese have to debase the currency in order to inflate asset prices, in order to stimulate some spending in the Japanese economy. They will want to expand the economy in order to increase taxes (i.e. GST increase), and they will want to pay off that debt. Reforms will be easier if there is stronger economic activity.

The USD against the Yen is about to reach a yet level of 80yen. The yen has not reached this level for decades, so it will be an important achievement. For reasons already stated above, I am not expecting this support to be breached, as there is just too many reasons for the Japanese to weaken their currency. Its a case of who can be the biggest currency debaser. Unfortunately I have not got the history back to the 1970s on this chart...I just remember the forecast I made last year that it would reach this level....so its finally happened.

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Andrew Sheldon www.sheldonthinks.com

USD set to strengthen against the Yen

These are indeed interesting times. We can see from the following chart that the USD is close to reaching its historic low of 81.86 against the Japanese Yen. It seems destined to reach this level in order to give traders some sense of upside. It is a fait compli that the USD is going to weaken. Why?

Well the Japanese economy is not exactly in a strong position either. We can expect some stimulus in Japan to come in the form of mass-printing of Yen. This will of course stimulate some domestic demand, and probably even stronger property prices. It will not contribute to the real economy, however it will allow the government to balance its fiscal debt, which is of course owed to the Japanese people.

At the moment the yen is at a support level of 84.94-85.00. I would expect this to be breached, and for the currency to plummet to the 81.86 level, if only for a day. The implication is that traders ought to be looking to take a trade position here. This also makes a great opportunity for Japanese people to buy a house in the USA foreclosed market given the weak USD. It is not a bad time to sell your property in Japan if you are repatriating USDs, but to what end when the yields are so much better in Japan. There is not going to be any huge recovery in USD in the short term, however there is sufficient upside to consider selling investments like property, i.e. A recovery is possible, and it could be as high as 125 Yen. The deciding issues are going to be:

1. Japanese budget balance - The extent to which the government resorts to taxation vs printing money to resolve the domestic public sector debt

2. Your time line - the longer you wait, the greater prospect of a US recovery. The US is still absorbing all their surplus property stock and liquidating the related debts.

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Andrew Sheldon www.sheldonthinks.com

USD has short term upside, though consolidating

The USD is likely to experience some strength in the short term against the Yen. We can see in the chart that there is upside to 91.89. Thereafter I would expect it to preserve its consolidation for the next few months.

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Andrew Sheldon www.sheldonthinks.com

The USD-JPY poised to strengthen

The Fed has apparently stated that it expects interest rates to rise in future. That is a commonsensical given:

1. The easy monetary policy, both in terms of low interest rates and the credit extended to US and foreign banks through other central banks.
2. The level of US debts, and the governments subdued capacity to raise tax receipts without increases in tax rates

I am still waiting for my energy tax. I suspect the US government is waiting for some resolution to climate change. They are waiting I think for scientists to get some consensus that there is no climate change consensus, before they step in and say, well just to be sure, we'll tax all energy, so in case there is a problem, we'll have our backs covered by spending on health care, etc.

Despite the fact that we are looking at a stronger US in future thanks to higher interest rates, I think we can expect further weakness in the short term. The cause of this is likely to be weaker economic indicators out of the USA. I am expecting the USD to find support against the Yen at its previous 15-year low of 81.6-83.6 yen. Currently the USD is trading at 89.32Yen, so there is room for a further 10% fall in the USD. I think it will be a quick recovery, and it might even be prompted by a global consensus to support the USD.
We must remember that Obama was in Japan, China and Korea last week, and there is every reason to think currency issues were discussed. No doubt those countries were looking for an assurance that the USD would not be allowed to fall, since they have large holdings of US treasuries. The US cannot expect these countries to support the USD unless they are prepared to raise rates. The chart below shows the trading history of the USD-JPY:
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Andrew Sheldon www.sheldonthinks.com

Japanese yen sinks to forecast Y86 level

In May 2009 I made the forecast (see blog post here) that the USD would fall to 86.5 before it would recover. This happened on the 7th October 2009, or near enough. The USD has been in a recovery against the Yen since. I would not be surprised to see the USD-JPY fall back again to this level before it rises. The justification will be primarily stronger interest rates in the US.

The prospect of an increase in energy taxes will also help the country's tax receipts and the terms of trade. I would not however be expecting any great improvement in the USD however....but expect some consolidation. The USD remains technically in its down trend against the Yen.

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Andrew Sheldon www.sheldonthinks.com

The USD set for further weakness

I'd be willing to bet that the USD is set for further falls against the Japanese yen in the coming months. All that Fed pump-priming has placed solid support under the stock market, no doubt raising confidence in the business-end of the US market. The problem of course is the continuing rise in unemployment and the decline in retail sales. We might ask whether the market is anticipating a recovery, or some sustainability in the equities market. I think there is little prospect of that. The USD and equities are likely to weaken, however it will not be a total collapse since there is no significant inflation in the market yet, and a little bit of inflation works wonders for balance sheets.

For the reasons above, I am expecting the USD to fall back to 87 yen over the next 6 months, thereafter I would expect to see some strengthening in the USD as property prices are perceived to have bottomed, and interest rates are raised to boost savings. Expect energy taxes in the US at this point to improve the US budget deficit. The weak USD will of course help offset the 'below the line' deterioration in US export competitiveness. At this point I don't see a fall to the Y80 mark, as occurred a number of years ago (see earlier posts), though I leave an open mind on this point. A short-lived fall to Y80 is possible. I actually don't regard this correction (recession) as an end to the bull market. I think the derivatives market will take the global economy to new highs until the derivatives market ultimately collapses in 10-15 odd years. The recovery will affirm the positive thinkers that their management was always good. The regulation that you might perceive today is really just perception-based. Regulation in future will be no better than in the past. Companies will get away with dubious disclosure.
There are a great many people expecting tragedy from the US market. Basically I don't see that. The US is one of the freest and most dynamic countries in the world. So as long as that is true, and it could be a great deal freer, then it will continue to trump the EU and Japan. It will do what needs to be done. Savings will need to be boosted as occurred under Clinton, to correct the imbalance left by Reagan. Most of the US imbalance was corrected just by the collapse in spending.
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Andrew Sheldon www.sheldonthinks.com

USD-JPY looks like falling to 86.50 yen

The USD technically looks like weakening. The head & shoulders pattern is indicated. There will be two points you can look for - a breach of the uptrend, and a confirming break of the 95.75 support level.
You might have expected a Clinton-like response from Obama on policy. But given the capacity of higher interest rates to undermine the housing sector, you can expect taxes on energy and the wealthy.
There is a meeting of countries in Copenhagen in Oct'09. I think that they will conclude that an agreement on Climate Change is too hard, so why don't we just tax energy heavily, reduce our reliance on the Middle East, raise a lot of money from discretionary spenders, give food vouchers to the poor, and just think deep thoughts about climate change. It was always only a facade to bring in a more comprehensive energy tax. Goerge was against it since it would have undermined his share price for Halliburton, but Obama fear not for the environment. That ought to raise a lot of tax as well, and I think America just might see a 'green is good' religious conversion as well. I am expecting they will annoint a 'green god' in the likeness of Obama.

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Andrew Sheldon www.sheldonthinks.com

The Yen set to strength against USD

After the recent rally in the USD I would be looking for some weakness. The market is due for some bad news. My bet is that the bad news over the next few months is going to be the 2nd stage of the property crisis. Stage 1 was the sub-prime mess, and next we are about to move into a succession of ARM-reset initiated foreclosures. This will kill any confidence inspired by the recent rally in equity markets. I would also suggest that it will also likely prompt the Fed to bail the US government out of another truck load of debt.
Anyway, this chart structure is telling me that there is considerable (6-point) resistance to a stronger USD, so on this occasion I sold USD-JPY. The target price is around 94.60.

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Andrew Sheldon www.sheldonthinks.com

The USD set to plummet!

The USD is set to plummet against a number of currencies. You might be thus wondering where to place your money. Against the gain currencies I would suggest the EURO offers the better opportunity. Some months ago I forecast the Yen falling to Y85. As you can see that move is almost complete, with the USD currently trading around Y90. At the time I attracted considerable criticism for this forecast. I would however expect the EUR-USD to offer far better trading however in the next 6 months.
The question is - Can we expect the USD to break Y83? I think if this were to occur we could be looking at the end of the USD as the international base currency. The question is - what would replace it? Clearly its not going to be the dysfunctional EUR, the distrusted Yuan, the disenfranchised Yen, and what of the worthless USD? Well, the implication is clear, its the USD or its a new global currency. Is it possible that the US debt profligacy was nothing more than a political statement by the US government. Was the US government thumbing its noses at mercantilist Japan and China and saying, SCREW YOU. By all means hold our USD debts as we are going to dilute the value of them. This is interesting times because we are looking at a global emergency, which can provide the justification for a strong USD (higher interest rates) or a new international currency. I would expect Obama to support higher interest rates in the spirit of former President Clinton. But then maybe he wants to distinguish himself by taken the road rarely taken. The implications for gold and the USD are clear.

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Andrew Sheldon www.sheldonthinks.com

AUD-JPY faces a consolidation period

The AUD-JPY exchange rate is an important indicator of the carry trade. At this point, we are witnessing a consolidation in the AUD after it hit support around Y86. This consolidation is occurring because of the mix of good and bad news facing the Aust economy. The focus is on Australia because we see notthing happening in Japan. No reform, no significant stimulus. Just a reshuffling of party leaders. One day they are bound to get it right. The factors likely to underpin some strength in the AUD include:
1. Weaker interest rates is likely to see a rebuilding of interest in property investment
2. Certain metal commodities have remained fairly strong - coal, iron ore, alumina, gold
3. Australia's commodity focus & position in Asia mean it will fair better than other commodity producers - except perhaps South Africa (gold, platinum focus)
4. Increasing takeovers and investments by Chinese companies in Australian resource projects augers well for the country's future. Remember the impact Japan's investment had on investment. China's participation will likely be more significant.
5. Stronger food prices and rains I suggest will likely see a stronger rural sector, also helped by mining.

Those factors undermining the AUD are:
1. Lower interest rates is likely to place pressure on the yen carry trade, as funds are shifted out of Australia. NZ?
2. Business investment is going to result in greater outflows, mainly for mining. These projects will see the AUD rise high in future, but investors are short term focused so they will focus on the current account deficit, although it does strengthen economic activity, it does not flow through greatly to the retail sector.
3. The weaker global economic outlook is placing pressure on commodity prices, and thus those countries with commodities exposure.

Short term I am expecting a stronger Australia equity market, initially from the broader market, but thereafter the commodity-based markets should kick back in, and will rejoice in the greater interest by Chinese investors (mostly government enterprises) in our mineral & energy resources. I actually don't see a lot of weakness in interest rates because inflation is still high and spending will likely recognise the bottom. Until the global economy can see a problem, I think we are looking at the AUD going sideways against the JPY. The greater action will be the AUD-USD until we see more positive recovery in commodity prices.
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Andrew Sheldon www.sheldonthinks.com

The USD-JPY - a cautionary note

The USD has experienced some strength lately, though I suspect that is about to come to an end around Y109. The USD did however convincingly break its downtrend, so that is reason for caution, however I would give it until the end of the month to prove otherwise. I believe the coming 2 weeks will be a bad one for the USD. I dont see stronger interest rates to support the USD. Might the US economy show some unexpected strength? Well we'll need to watch the indicators. Importantly the Dow Jones index is at a support level, and I suggest that is a basis for support.

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Andrew Sheldon www.sheldonthinks.com

The USD-JPY on a knife edge

One of my readers from Japan Forum was highlighting the fact that the USD has been strong lately - contrary to my few that it could be heading to Y85. I retain the view, and gave him the following response:

I think its premature to say whether I still believe the USD-JPY is going to Y85. My reasons for weak USD are that I think US Fed will lower fed rate to 1% as before, concerns about an election, weak economic news and also the possibility of a bank failure. Likely JP Morgan or Goldman Sachs based on their derivatives exposure, but who knows. Also if you look at a chart, the USD is at the peak of its long term downtrend, so you might want to hold that thought. I of course expect it to fall. In support of your view, you might want to look for strength in USD over the coming week. We are really on a knife edge.
Basically I dont see USD going to Y85 as any sign of USD worth, just as a speculative possibility. Which is why I recommend AUD, rather than JPY-USD on my blogs. AUD doing very nicely. So maybe its an issue of perspective. If you want to hold USD long term, I do think the USD will rise strongly next year. As I said months ago, the US will eventually have to raise interest rates to become a 'savings' country, so the associated higher interest rates will result in a stronger currency. Just in the short term, I see weakness. So maybe its an issue of time perspective. As a trader my money goes elsewhere.

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Andrew Sheldon www.sheldonthinks.com

NZD makes sense as a carry trade

The NZD has been having a rally of late. If you focus on the negative press you might have thought otherwise about holding NZD. The reality is that a weak domestic economy is good for the NZD since it undermines credit growth and domestic consumption, which in turn reduces imports, whilst exports remain resilient. NZ has the benefit of being a food exporter, so it should benefit more in future as we see more general increases in the prices of food. NZ produces little oil so there is some basis for weakness there. NZ is not a great story, but if you are looking for a interest swap (yield) proposition it makes a lot of sense, whether as a carry trade.

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Andrew Sheldon www.sheldonthinks.com