Is the Yen pulling back into its downward trend, or will we see another Yen rally next week? This is a very important indicator to watch right now, and it's important not to overlook this in the short term like the market overlooked it last Tuesday's drop.
However, it's also important to keep in mind that any surge of the Yen could be a temporary one, because of several reasons. First, recent volatility could send the Yen up and down sharply as it did for this past week or so. The Yen has traveled as high as Y121 to the dollar on market turbulance and a drop in the Chinese market.
- Looking at this situation from a panic-free view we can see that Japan is the world's second largest economy on 0 inflation as core consumer prices remaining steady since last year.
- wages fell the most in almost two years, so further interest rate rises look less likely.
- Prices have been falling in Japan since the late 1990s with a build-up in production capacity, surplus workers, and huge accumulated debt. Surplus workers lead to a steady cut in wages, leading to lower prices, leading to deflation , thus, taking away from corporate profits, leading to a higher surplus of workes and more wage cuts, bringing down consumer spending and economic growth and...ok well, you get the idea.
- All of that hardly spells out inflation, and the current fear that the carry trade might unwind doesn't make much sense from this point of view. The Bank of Japan, from this perspective, is trying to slow down deflation rather than inflation, and an excess of cash from an unwinding carry trade would at the worst force them to raise rates, bringing the currency back down.
Even though the end of the carry trade might not seem as likely as the market is fearing, a lot of economic data is coming out which could change the story.
*A good hedge against a possible Yen rally next week is to invest in gold, to hedge against a weak dollar. Even though gold is usually considered a safe haven during times of recessionary worries, gold has continued to be weak. Gold was up today, but gold stocks continued to come down so we could see a possible bottom and turn around. Faveorite name in gold is Barrick Gold (ABX)
*My perspective on the Yen further supports my short term strategy should be to buy on pullbacks and sell into the rallies. I will also be shorting if the market rallies above levels of this week's highs. This should be the strategy until we have a clearer understanding of inflation vs. recession, the global economy, lower skepticism, and a clear bottom in the market .
$28.55 (03/12/07)
