Safety Net
Fundamentals
The greenback is not the only currency that has benefited from recent turmoil in the equity and commodity markets. The Japanese Yen has risen to six-week highs versus the Euro and Dollar, as investors pull their funds out of riskier asset classes. Recent economic data suggests that traders may have been overly optimistic about an economic recovery in the US, causing declines in not only equity prices, but also commodities. The G8 summit, which begins today, is expected to be a dollar-bashing festival. The BRIC countries - Brazil, Russia, India and China - have all recently suggested that the global economy may be better suited having a world trade currency, rather than relying on the USD. If Western European leaders offer similar assessments, risk-averse traders may favor purchasing the Yen over the greenback. There is now talk of a new stimulus package in the US, which would increase already high government spending and could lead to a collapse in the Dollar. At this point, it does not look as though there is even close to enough support for such a measure, but the Dollar could decline if more Democrats get behind such a plan.
The recent surge in Chinese lending has made traders fearful of the creation of asset bubbles. The government has tried to compensate for slumping exports by flooding the domestic economy with Yuan. This situation is eerily similar to the situation in the US after the boom in the late 90's and the Nasdaq bubble bursting. The Fed created a low interest rate environment, leading to the eventual housing market bubble and the current banking and economic crisis. Investors may tread lightly when investing in riskier asset classes because of the possibility that a Chinese banking crisis could lead to further woes for the global economy. This could be seen as supportive for both the greenback and the Yen.
While outside markets have supported the Yen, the Japanese economy has not. Machinery orders dropped by 3 % in the month of May, versus estimates of a 2% rise. Japan's current account surplus fell 34.3 % versus the same period last year, indicating weak demand for Japanese goods. This report is actually both a positive and negative for the Yen. The data does show that the downturn to the domestic economy may last longer than expected, which would be negative for the Yen. The report can also be seen as a barometer of economic health for the globe, showing that consumption in other nations has shrunken, favoring the Yen as a safe haven investment. Japanese companies have had a difficult time getting loans from banks, which may result in the Bank of Japan extending its emergency lending program, which could adversely impact the Yen.
Trading Ideas
Some traders may wish to take a wait-and-see approach with regards to the September Yen contract. While the fundamental outlook may favor a long position, there has been no technical confirmation to support that stance. In the long run, the Yen may move higher, but the timing may not be right. Consequently, some traders may choose to wait for several closes above the 1.0625 level before entering into a long position, and then perhaps work a relatively close stop at 1.0450. Stops may then possibly be adjusted higher if and when the market closes above 1.0850. Some holders of long positions may perhaps want to look at 1.1000 as a possible exit point.
Technicals
Turning to the chart, the September Yen contract is once again testing levels above 1.06. The last two times the contract has traded this high, in mid-March and late-May, the market was unable to hold these highs. Traders will keep a keen eye on how prices behave at these levels. Several closes above 1.0624 could signal a breakout from the sideways range the currency has been in since March. If the market is unable to build on recent gains, the Yen may continue to trade range-bound for the foreseeable future. The 14-day RSI is approaching overbought levels, which could inhibit further rallies. The %D line on the slow stochastics has crossed over into overbought territory, but the %K line remains below. A crossover above the 80 % mark would be seen as bearish.
Rob Kurzatkowski, Senior Commodity Analyst
