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We continue to stand by the view that a short position in the Japanese Yen will be a consistent and perhaps significant play in the coming year. As we have mentioned in prior issues of this newsletter, we think the Yen saw an undeservedly dramatic appreciation due to the sub-prime crisis and that global interest rate anomalies served to boost the Yen to levels that would never have been possible based solely on interest rate and economic differentials. We also think that the Yen was given an additional and possibly final boost into the overvalued atmosphere in the wake of the Dubai credit crisis. From the late 2009 high to the January low, the March Yen already mounted a slide of 900 points, highlighting how overvalued the Yen got. While it has managed a bounce off its January low, the Yen still remains 2900 points above the mid 2007 lows.
It is also our opinion that the global interest rate anomalies drew what could be one of the largest speculative inflows to a single trading theme in history in the form of the “carry trade” and that the unwinding of the those positions could exert significant pressure on the Yen. While there are certainly many reasons this bearish outlook could prove wrong, perhaps the most painful would be if the world economy were to fail to recover. However, in the event that the global economy does continue to recover and more countries move to raise interest rates, we think the onus will be on participants in the carry trade to unwind their borrowing of cheap money in the US that they used to invest in higher yielding instruments in Japan, which would force them to buy dollars and sell Yen. While it is always possible that the Japanese economy could throw off its decade long deflationary condition and begin to grow aggressively, we don’t see that as a likely prospect. Therefore, we will continue to suggest that traders use moves back above the 110.20 level in the Yen to implement longer-dated, somewhat out of the money Yen put positions.
After seeing a 7 year pattern of declining Dollar action, it was logical for the Dollar bears to be a little concerned about the January 2008 to March 2009 recovery effort. However, we would suggest that the subsequent return back near the 2008 lows and then the rejection of that weakness might be a sign that the Dollar found some form of low value zone. In addition, considering the number of negatives that have been lobbed towards the Dollar over the past year, one would have expected a full return to the 2008 lows, especially in the face of ideas that the US was trending toward a default of its debt commitments. It should also be noted that the TARP costs were not as bad as feared and that the recent loss of the Democratic super majority in the Senate could bring about some spending restraint on the part of the federal government. With the US economy also showing signs of recovery, one could suggest that the Dollar is entering 2010 with significantly fewer burdens than it saw at the beginning of 2009.
Lastly, it would seem like a lot of luster has come off the Euro compared to last year, and that has prompted many traders to suggest that the Euro zone might be one of the last areas to have the capacity to raise interest rates. Therefore, we think traders have to give the Dollar the benefit of the doubt. With the prospect of the highest Dollar exchange rate since September 3, 2009, one could suggest that the technical outlook on the Dollar has turned positive.
