USD vs. JPY: The Biggest Loser

Submitted by Nic Lenoir of ICAP

The JPY has been considered the weak currency amongst the majors pretty much universally for most of the last decade. The interesting thing is that frankly one cannot really look at the monthly chart and really say the USD has been stronger. There have been spikes of relative USD including lately from 2004 to 2007, but really overall the two currencies have been trading water against one another, and if anything it's the JPY winning.

The recent change of administration in Japan and the new party's strong Yen policy have caught the ear of many market participants, and in the past month or so the JPY has practically appreciated 10% against the greenback. There are many discussions that the USD is the new carry currency. Well really it feels like it has been a carry currency for a long time. Wasn't 2002 to 2007 a big housing/commodity/emerging market carry trade? I thought that was exactly the point: we have had a loose monetary policy, not just in terms of rate but also in terms of leverage allowed and expansion of the shadow banking system, such that the USD has been a carry trade currency not only because of the rate, but the availability. When the availability disappeared last year, it did not matter that rates were cut to their lowest levels ever.

Bottom line nothing drastic has changed in terms of us replacing the JPY as a carry currency, it's more that with the talk of a strong Yen people act as if there is only one carry currency left. On a weekly chart one sees we are still well anchored in a downtrend channel, though there is an intermediary support seen on the daily channel both in term sof price and RSI.  Nothing overly exciting, we could bounce short-term but it remains a bear scenario until we break the weekly down trend.

Enjoy the weekend,

Nic