Currencies | Feb 27 2009
By Chris Shaw
For some time, Dennis Gartman, market commentator and publisher of daily “The Gartman Letter”, has highlighted the role of the yen/euro cross in terms of providing an indicator for investor sentiment with respect to global equity markets.
Earlier this week, Gartman commented the upward move in the euro against the yen in recent sessions was “not just a one day wonder of technical importance, this is instead a change in trend of very real importance with longer term implications”.
He added the change not only impacts the euro/yen trend, but the trend of the yen against other major currencies such as the USD and Canadian and Australian dollars as the global appetite for risk seems to have turned and is likely to continue to turn for the better.
This should bode well for the immediate outlook for equity markets.
Bank of New York Mellon’s analysis came to a similar conclusion. The bank’s currency analysts suggests the recent move in the yen from around 88 against the US dollar to closer to 98 now shows Japanese investors have again turned to foreign bond markets as was the case with the so-called “carry trade” of recent years. To refresh our memory: the yen was used as a funding currency to chase the higher yields on offer in other countries. At the same time, recent movements can be seen as proof the currency’s safe haven status during the global financial crisis has come to an end.
Japanese Ministry of Finance data support the bank’s analysis, as these data show for the week ending February 19th Japanese investors bought 1.23 trillion yen worth of foreign bonds. The only higher amount in the past four years was the 1.36 trillion yen’s worth bought the previous week.
According to Bank of New York Mellon, the move to again invest offshore reflects fears for the domestic economy given recent data have been very bad – GDP fell sharply in the December quarter and machine tool orders fell by more than 80% in February. Japanese exports have also fallen away sharply, as the stronger yen erodes the company’s competitiveness and this is causing companies to lay off workers in their thousands.
As Gartman pointed out, the monetary authorities have done nothing to offset this latest round of weakness in the yen, as it works to their advantage in terms of making the country’s exports more competitive.
With the economic outlook for Japan increasingly suggesting the recession is deepening, while also implying a fresh era of deflation may be approaching, Bank of Mellon New York is not surprised Japanese investors are again looking to generate some return on their money by investing in foreign markets.
The technical performance of the currency suggests further moves down are likely. The bank points out the USD/yen pair has completed a double bottom in recent sessions. This implies a near-term target of 102. While some technical measures such as the 20-day moving average, which currently stands at around 100.3, may provide some initial resistance, this is expected to be only temporary and further falls in the relative value of the yen are likely.
While the pace of the recent move leads Gartman to suggest now is not the time to add to or establish positions, any bout of strength in the yen in the next few sessions would offer an opportunity to sell the currency more aggressively.
As an example of the potential magnitude of the move that could unfold, Gartman has set an initial target of 94-96 for the yen/Canadian dollar pair, which compares to a current level of just under 78.
