Yen Resurgence is Vicious

The yen crosses are all taking a beating. After more than a year of weakness (mostly through carry trade borrowing) the Japanese yen is cleaning up. Even the US dollar, up against all the other major currencies, is not safe from the yen’s resurgence.

The yen is now at its highest level since July 2006. The high-yielding currencies have suffered the most, with NZD/JPY and AUD/JPY both falling over 5% yesterday. EUR/JPY has acted the proxy for carry trade sentiment in the foreign exchange market, and the currency pair fell 2.3%. And just as we predicted yesterday, USD/JPY blew past the stops at 116.50, and reached 113.60 in early New York trading. Even against the pound, which looks to be the most fundamentally-backed of the major currencies has fallen against the yen, as GBP/JPY dropped 700 pips yesterday. The carry trade unwind is on, folks, and this is just the beginning. If the market has its way, the Japanese yen will appreciate even more.

But that’s just the thing. There’s a chance the foreign exchange market will not be allowed to have its way. The Bank of Japan has a well-deserved reputation for aggressive intervention, and it will be looking at the recent yen gains with some dismay. Japan’s domestic economy basically sucks, and the country’s production is being kept afloat by its world-beating export industry. A stronger yen is bad for business. That’s the reason that Toyota’s share price fell 3% last night. The BoJ could look at the yen crosses and say the Japanese currency is overbought. If that happens, we will see the yen give back a lot of its gains.