By William Doody
The Japanese Yen has appreciated significantly in recent months as currency traders sought to hedge against the possibility of a slow or failed economic recovery. The Yen has risen against the U.S. Dollar, the British Pound, and the Euro, as well as against the major commodity currencies such as the Australian Dollar. We believe that the market has now priced in all but the worst-case scenario for the global economy and we see little to support a further rise in the Yen.
As equity markets rebounded in the second quarter, fundamental economic data failed to keep pace and many analysts began to warn of the possibility of a “double-dip” or failed recovery. As a traditional safe-haven currency, the Yen benefitted from those concerns, rising handsomely against most other currencies. Going forward, however, we believe that most traders have taken into account the likelihood of a weak recovery and have moderated their expectations. At the same time, the economic fundamentals in Japan remain weak and unlikely to support a high valuation for the Yen.
In particular, we would buy the Dollar and Euro against the Yen on the view that any economic recovery, no matter how anemic, will be stronger in the U.S. and Europe than in Japan. We would hesitate to buy the Pound, considering our previously stated belief here that the U.K.’s economy faces significant headwinds. We would be willing to open long positions in commodity currencies versus the Yen, as even flat commodity prices would support higher currency valuations from here based on relative yield.