Notes From Underground

The resignation of Prime Minister Hatoyama has set off a short-term wave of YEN selling as the new PM-designate is deemed to be an advocate for a LOWER YEN. Kan Naoto in his recent position of Finance Minister has battled with the BOJ regarding the need for a lower YEN-based monetary policy. Thus, the market, we believe, has reacted correctly in selling the YEN against the DOLLAR and all of the crosses. Will this YEN softness begin a trend?

The answer is, of course, we don’t know, because of all the other variables in play in global financial markets. Many traders have lost money during the last six months by selling YEN because of the horrible fundamentals in Japan. We have continually stressed that a nation in the throes of deflation cannot tolerate a strengthening currency. The problem for Japan has been the horrid conditions in Europe causing risk to be taken off the table, thus leading to a decrease in the YEN-funded carry trade. If Europe were to move off center stage, the focus will move to Japan. And with Mr.Kan in the PM position, the market is right in anticipating a weakening YEN.

Please consult your technicals and find the point of lowest risk to enter this trade, for the volatility will be great. One thing we have learned is if this trade is to gain traction, watch the action in the Japanese market. If early YEN strength gives way to weakness on an ongoing regular basis, it will mean that Japanese investors are beginning to move assets out of Japan in anticipation of a weaker YEN. Again, the story will be told in the technicals as this trade has been a difficult one for quite awhile. Also, the NIKKEI may well be a barometer here for any real development in a weak YEN story. We are also attaching a political profile of KAN NAOTO written by my son, Tobias Harris, from the blog, Observing Japan. Without prejudice we believe this is the best site for all things political in Japan that is written in English.

Tags: deflation, Dollar, Hatoyama, Japan, Kan Naoto Nikkei, Yen

This entry was posted on June 2, 2010 at 2:44 pm and is filed under Currency. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.