In Akira Kurosawa’s famous film “Yojimbo”, a farmer remarks: “Everybody’s after easy money.”
In recent months, much marketplace and media attention regarding foreign exchange arenas has focused on the travels of the United States dollar, the Chinese renminbi, the Euro FX, and an assortment of emerging marketplace currencies. The Japanese Yen has captured relatively little of the limelight. But it should.
Marketplace history of course need not repeat itself, either completely or even partly, but players should not overlook or dismiss parallels. The Japanese Yen’s rally in the past few months reflects current (and points to further) worldwide economic weakness. Recall the Yen’s rally during the worldwide economic crisis of 2007-09.
During the acceleration of the global economic disaster of 2007-09, both the Japanese Yen and the United States dollar made major bull moves on a broad real trade-weighted (effective exchange rate) basis. The Yen tumbled dramatically from its 2011/2012 summits. But that bear move probably ceased in mid-2015. The modest rally in the Yen since June 2015 has coincided with the continued advance of the dollar’s broad real trade-weighted major bull move. Moreover, as during the 2007-09 crisis span, the Yen’s effective exchange rate climb has accompanied a rally in its cross rate against the dollar.
Not only is the current Yen bull trend a bearish sign for world economic growth. It also is a bearish indicator for the Nikkei, S+P 500, and other key stock benchmarks. As massive Yen depreciation alongside quantitative and qualitative easing (QQE) helped to propel the Nikkei (and thereby other stock marketplaces such as the S+P 500 higher), growing Yen strength (all else equal) tends to push the Nikkei and other stock realms lower. The Yen march upward since June 2015 coincides with slides in equities, a drop in the US Treasury 10 year note yield, and renewed sharp falls in commodities “in general” (and petroleum in particular).
On 1/14/16, the S+P 500 touched a low at 1879, very close to its 8/24/15 low at 1867. It then rallied, closing around 1922. The Nikkei’s 1/14/16 low at 16944 hovers right above its 9/29/15 trough. What about the Shanghai Composite? Its low on 1/14/16 at 2868 neighbors its 8/26/15 depth at 2851.
Previous essays have discussed the Federal Reserve Board’s effort to slow, halt, or reverse marketplace declines in the S+P 500. For example, see “Playing Percentages: Stock Marketplace Games” (7/13/15). In the current environment, stock slumps of around ten and 20 percent from an important plateau (such as the May 2015 one) are important guideline levels for the Fed. The Fed’s preferred method to stop downward moves of around ten percent is talk (wordplay) rather than action. Falls of around 20 percent (or more) increase the odds of action (perhaps even renewed quantitative easing).
Thus today’s speech from James Bullard, the President of the St. Louis Fed, is rhetoric aiming to support US (and perhaps other) stocks (“Oil Prices, Inflation and U.S. Monetary Policy”).
Such charming wordplay from the Fed (and its central banking allies) can induce rallies in the S+P 500. However, it probably will not stop the S+P 500 from resuming its bear move and breaking beneath its August 2015 bottom. The Nikkei will fall under its 9/29/15 low, and the Shanghai Composite will venture beneath its late August 2015 bottom. The broad real TWD will remain strong for at least the near term; the Japan EER will continue its modest rally, as will the Yen’s advance against the US dollar.
For additional currency, stock, interest rate, and commodity marketplace analysis, see “The Curtain Rises: 2016 Marketplace Theaters” (1/4/16) and earlier essays.
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Japanese Yen- Currency Adventures (2007-09 Revisited) (1-14-16)