Dollar Support Breach Alert
The rampaging deflation in Europe and Japan has to be giddy about this development. Bernanke is sitting in a windowless, telephoneless office, and is not answering any press queries about his repeated statements to keep the dollar strong.
And this from a Goldman research piece released to "clients" this morning:
Trade Update: Top Trade #11: Go Long $/JPY With a Target above 105. July 31, 2009
With structural considerations still pointing clearly to a weaker JPY, we think the opportunity for notable JPY weakness is the best it has been all year.
We recommend clients consider being long USD/JPY with a target above 105.
Our basic view has been that the JPY belongs at weaker levels and the main structural reasons on that front are if anything even clearer now than earlier in the year. JPY remains two standard deviations expensive on GSDEER (currently around 115), financial conditions in Japan are too tight (and have continued to tighten) and the Broad Balance of Payments (BBOP) is in large deficit - to the tune of 6.7% of GDP on a 12-mth ma - on the combination of a weaker trade balance and significant portfolio outflows.
We think there are two sets of reasons why the JPY has not so far responded to these dynamics. The first reason is rate (and growth) differentials. With US and Japanese policy rates both firmly anchored around zero, rate differentials have been extraordinarily narrow. And even as the US and global economy has stabilized, the notion that tightening is not imminent in either country has left short-dated rate differentials at historically low levels. Not only has this left the US as an alternative funding currency within FX, but it has made it less costly (in a carry sense) than it has been in a very long time for Japanese exporters and life insurers to hedge against a stronger JPY. The second reason is that speculative positioning has generally been substantially short JPY since March, as our Sentiment Index has clearly shown.
There is some risk that with a US tightening cycle a long way off, this is (still) too early for USD/JPY to move back to where we think it belongs. But with the downside in our view relatively limited, lighter positioning and some identifiable cyclical catalysts, we think the risk-reward is more attractive than it has been for some time.
Goldman clients everywhere rejoice.