Will the yen face a repeat of 1995?
After an earthquake in 1995, the yen appreciated quite a bit. But this time may be different.
As Chris told you in Friday’s essay “G-7 Coordinates Intervention to Push the Yen Lower”, the big story was the G7 stepping into the currency market and selling yen on a coordinated basis. As you would expect, it was the worst performing currency of the day by ending up with a loss of about 2.25%. The yen (JPY) fell all the way to 81.99 on Friday morning, but barely climbed back into the 80 handle by the time I left for the weekend on Friday afternoon. All of the excitement in the currency market really took place in the Asian and European trading sessions, so it was actually a fairly quiet day for US traders. In fact, most currencies ended the day higher in US trading, including the yen.Skip to next paragraph
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I saw a report from UBS that basically told investors they should forget about yen strength, which certainly backs Chris’s call last week to consider exiting the yen while it’s still relatively high. I’ve had several conversations with investors as to the likelihood that we see a repeat performance after Japan’s 1995 quake when the currency ran up about 20%. I agree with Chris in that it doesn’t seem likely. The world is a much different place now and there are several factors working against a significant appreciation.
First of all, the interest rate environment is different. Back then, we had both the US and Germany cutting interest rates, so the rate differential was narrowing; as opposed to the current situation where interest rates globally are on the rise. In other words, the current interest rate environment was already working against the yen before the quake. Second, one of the few bright spots for Japan was its export strength. It has posted a current account surplus since 1986, so erosion to its trade surplus from increased demand on imports and limitations of some exports would pose a real threat.
We also have a situation where Japan could become the first G7 country to return back into recession after fourth quarter GDP contracted 0.3% as government stimulus was being removed from the economy. Limited economic growth and falling consumer prices before the quake weren’t exactly positive points either. While continued repatriation of funds back into Japan could keep the yen exchange rate sticky for a while, the continued thought of intervention and weaker economic numbers should eventually win out.
Moving west into the United States, its going to be a busy week in the economic data department. Today, we have the existing home sales figures from February. The expected result from a majority of the economists is a drop of 4.7% to an annual pace of 5.11 million. We saw sales of previously owned homes rise to an eight-month high in January, but foreclosures and short sales rising to a 12-month high was the catalyst behind that move. In fact, the foreclosure inventory rose to a record 2.2 million in January, with another 4.7 million households not current on their mortgages.
It’s really a foreclosure and distressed-property driven market, as investors are hand picking real estate that is being thrown in a fire sale by individuals needing to sell, or banks just wanting to unload repossessed inventory. Either way, it’s not exactly a sign of a market returning back to health. While we do have some important numbers to look at this week, such as durable goods and personal consumption, I think most investors are waiting for the final revision of fourth quarter GDP on Friday.