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After being on the verge of making a new 8-month low against the Dollar, the June Yen proceeded to have a monumentally large rally during the market turbulence of May 6th, far exceeding the size of any other currency move that day. This rally was so severe that the June Yen’s low and high prices for 2010 were achieved within 13 hours of each other. Even though most of those gains were given back within a day or so, the Yen has continued to find strong safe-haven support whenever there has been any sort of flare-up of EU sovereign debt problems. The most recent example of this was on May 19th, when the announcement of a unilateral German short sale ban created a risk aversion shock to financial markets worldwide. While it is definitely too early to think that the European crisis has been completely resolved, the 750 billion Euro crisis prevention plan developed earlier this month has meant that no other EU nation has as yet reached the crisis stage that Greece reached a few weeks ago. It is also important to remember that the Japanese government has made it clear that they are looking for a much weaker Yen, mainly to assist the recovery of their deflationary economy.
Recent Japanese economic data has provided some signs of revival, but there are still key numbers which remain solidly weak. The latest edition of the key Tankan survey continues to be negative, while both Japanese CPI and PPI have been lower for the past few months, illustrating how entrenched deflation has become with the Japanese economy. Although very low interest rates in Japan may hamper any monetary policy moves that the Bank of Japan may consider, it is likely that any sort of stimulative action undertaken will result in a much larger Japanese money supply. It is unlikely that recent plans for deficit reduction in Japan will find much support, as an aging population and a reluctance to embrace immigration as a measure to increase the Japanese workforce have made reviving the economy the main priority. If events outside Japan start to calm down, it is more likely than not that the June Yen will make another run at the lows from earlier in the month. An extension of the recent safe-haven rally due to EU tensions may provide enough of a price boost to the June Yen for us to approach the short side.
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