I suggested on Friday that old mercantile forces would start to gripe if the Japanese yen continued to rise too far. Sure enough, Reuters reports this morning that the Japanese Finance Minister, Hirohisa Fujii, is backing away from earlier remarks he has made essentially welcoming a stronger currency. Fuji even went so far as to suggest that there potential exists for intervening in the currency markets to drive the yen down. No doubt he is now getting an earful from exporters and the pro-mercantile camp. The simple fact is that no matter what we hear on official levels, almost no major industrial country wants a strong currency right now. Almost all are looking across their borders and across the seas for the export revenues to drive domestic employment and boost economies. Of course, in the past, such eager yearning looked to the United States as a welcome dumping ground for excess production. Those days appear to be over – at least for now – as the U.S. actively drives its own currency into the ground and joins the U.K. in challenging traditional export-powerhouses like Germany and China over their current account surpluses.
I am not adding to the USD/JPY long I initiated on Friday until I see more reaction from currency traders to this latest twist in the yen’s saga. I suspect that when currency traders finally do turn on the yen, the move down will be almost as swift and strong as the current move up. The difference in LIBOR rates between the yen and the U.S. dollar are relatively small, and for those traders looking for a funding currency for carry trades, it makes more sense to go after a currency that is both declining now and appears to have plenty of room to fall in the short-term.
Add a weakening yen to a weakening pound and a dollar relief rally gets more traction. This relief rally could be quite sharp because trades may swiftly close out their carry trades against the U.S. dollar and together create a self-reinforcing updraft. Only when the dollar-bearish crowd thins out will the dollar be ready to resume its inexorable decline.
(Note that this morning that World Bank President Robert Zoellick warned America not to take for granted the dollar’s status as a reserve currency.)
Be careful out there!
Full disclosure: long USD/JPY