Reader Rod is a good one for sending me questions, and generallyÂ interesting ones at that. Here’s his lastest inquiry.
What was the source of Yen strength from April to December 2009?
The carry trade was back, so “unwinding of the carry trade” doesn’t seem right.
“Safe haven currency” would be odd as well, as there was a global “risk on” investment theme during the year.
Their trade surplus was contracting, and so was economic activity. Budget deficits as a % of GDP the highest in the industrialized world.
Expectations of an Inflation differential (and interest rate differential) were not biased to the upside.
“Potential for capital appreciation” (stock market expectations), not really.
Unfortunately for Rod, I’m going to have to give him some stick here – in a nice way, of course. 🙂
First, let’s look at a USD/JPY chart of the timeframe in question. The line is a linear regression to highlight the general trend of that period, not that it really needs much highlighting.
Now let’s take a look at a chart of the Dollar Index for the same period.
Notice the same downtrend pattern. In other words, USD/JPY was falling on dollar weakness rather than yen strength.
Just to reinforce that view, here’s EUR/JPY for the same timeframe.
As the regression line shows, if anything there was a slight upside bias to the cross, meaning a weaker yen, though I’d call it basically neutral.
The moral of the story is that in the forex market (and others as well) one needs to look beyond just one pair to get the real story. After all, a pair represents only the relationship between two currencies. It may or may not be reflective of general strength or weakness in one of the components.
Had Rod looked beyond USD/JPY to determine the real position of the yen he would not have realized that it really didn’t rally during the April to December timeframe, putting his mind at rest. 🙂