Yen Draws Safe Haven Share

by Ashraf Laidi
Jul 16, 2010 19:15 | 37 Comments

As long as US economic data shows fresh round of deterioration, and the Eurozone is able to supress event risk on the sovereign front, the Japanese yen shall cotinue to draw the lion's share of risk-aversion flows away from the USD. But let's first go over the USD's recent decline before further dissecting the yen flows.

The 7% decline in the USD's trade-weighted index from its June highs has evolved from stabilizing global equities to broadening weakness in the US data front. The resulting decline in US bond yields has accelerated the USD sell-off to the extent of eroding US yield differentials relative to EUR, GBP and JPY. The broad downgrade of the US growth outlook by the FOMC shuts the door on any remaining form of policy tightening this year, thereby, exacerbating the decline in yields. In fact, the minutes of the FOMC meeting allowed for renewed easing in if the outlook were to worsen appreciably.

The chart below shows the spread between German and US 10-year yields (GE minus US) has improved to -0.31%, the highest since October 2009. A decent Spanish bond auction and eroding liquidity concerns in the Eurozone have helped accelerate the euros rebound. Renewed declines in US new home sales, payrolls and consumer confidence are tipping the balance into a possible double dip recession. US 10-year yields have also fallen relative to their UK and Japanese counterparts, nearing their worst levels in 12 months.

Yen Draws Safe Haven Share - EURUSYIELDJUL!6 (Chart 1)

EURUSD broke above $1.29 but may fail to close the week above the 100-DAY MA, which would have been the 1st positive cross this year. Euro remains propped with the potential of extending towards $1.3130. A close below $1.26 would be required next week to fuel hopes for a prompt USD rebound. Otherwise, $1.3130 is next in the cards.

EUR diverged from GBP as EURGBP broke above the key 0.84 preliminary resistance, eyeing 0.8490. I maintain my negative bias on EURGBP considering widespread sovereign questions in the Eurozone and the contrasting inflationary picture between the above-target 3.2% UK CPI and the Eurozones 1.4%.

Yen Does it Again In July 7th I wrote The combination of US earnings season with European stress tests will likely stand in the way of equities regaining their April highs, while the expiration of US jobless benefits and homebuyer credits could speed the way for the downside. Such a scenario paves the way for deteriorating risk trade, with the JPY most apt to assume the role of risk-aversion beneficiary. Many observers are loath to mull USDJPY below the mid 80s, citing opposition from Tokyo. But with the USD part of USDJPY equation remaining vulnerable to US data uncertainty and the JPY part gaining from the aforementioned red flags to global growth and risk appetite, the implications for sub 85 USDJPY are becoming increasingly suggestive. And with global bond yields caving in to disinflationary pressures and growth concerns, Japanese capital will turn away from yield appetite to safety appetite.

Today, US 10 yr yields drop below 3.00%. USDJPY knives below yesterdays 87.20 target, now eyeing 85.80 as the deteriorating stochastics call for extended JPY strength. The chart below shows the double bottom in the VIX may rebound towards 34-35, which case USDJPY will have a valid grounds for retesting the 84.80 lows.

Yen Draws Safe Haven Share - Jpyvixjul16 (Chart 2)

My original analysis from October 2008 explained how USDJPY would continue to break to new lows as long as the case for a Fed tightening remained weak. With the June FOMC minutes showing the first economic in nearly a year, and bond yields under pressure, the door for a 2010 tightening has been firmly shut.

Dj-Vu from May 21st equities made a late session rally on news that Goldman Sachs would settle its lawsuit with the SEC, but news of Googles earning miss was not ignored by Asian markets. Nikkei-225 fell 2.9% on what is said to be fears of prolonged yen strength.

Wednesdays VIDEO MARKET ANALYSIS explaining the rationale for choosing GBPJPY and EURJPY

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Comments (Showing latest 10 of 37) View All Comments
said
mulhouse, France
Posts: 2822
9 years ago
Sep 28, 2010 21:54
and the southern hemisphere too

only the northern
said
mulhouse, France
Posts: 2822
9 years ago
Sep 28, 2010 21:28
me too i boycot the cherry of south africa
jt133
Florida, United States
Posts: 2
9 years ago
Sep 28, 2010 18:56
Ashrafs anti american sentiment is very obvious in his coomments -
Ashraf Laidi
London, UK
Posts: 0
9 years ago
Aug 24, 2010 14:34
You all remember this yen TRADE WIGHTED INDEX chart from 2 weeks ago:

JPY Index shatters 2009 high of 135 now at 139.14. Chart from 2 weeks agohttp://bit.ly/aivsPK

Ashraf
Carlco
bristol, UK
Posts: 151
9 years ago
Aug 24, 2010 14:27
usdjpy breaks dec09 lows, wow looks like nothing can stop this rolling stone now. great cnbc interview.
josh
Hong Kong
Posted Anonymously
9 years ago
Aug 24, 2010 11:41
hi vasya i am still waiting for ur 70 oops i think u can change that for yen tgt against USD and not dollor index
josh
Hong Kong
Posted Anonymously
9 years ago
Aug 11, 2010 16:19
Vasya i am waiting for ur 70 it wont come for the next 5 years
Ashraf Laidi
London, UK
Posts: 0
9 years ago
Aug 11, 2010 0:23
GBPJPY looking to retest 134.70s after disappointing Nationwide figs. Mervyn King tmrrow to testify after BoE inflation report

Ashraf
josh
Hong Kong
Posted Anonymously
9 years ago
Aug 9, 2010 20:01
ok vasya i hope ur not buying dollor ...the point is this is it yen is appreciating coz of major deflation wave anyway let it play out anyone can be wrong .but i think i am right
Vasya
Buburatcho, Bahamas
Posted Anonymously
9 years ago
Aug 7, 2010 2:48
Keep buying Dude, cause it's going to 70 on index. :)

FEDs need income, since there is no growth, then Income will come

from Dollar devaluation, why you think they so angry on Chinese (Largest US DEBT holder?)

Dollar getting devaluated by 15%.. Buy SILVER while you can.. All those "Deflation story" bozos

are working for FED.. $82/barrel OIL is that Deflation??? How about $1200 GOLD?

Wake up and get real. Those who load up on US Treasuries now going to pay big,

Cause US FED is broke.. End of story.