A Strong Dollar Or Just A Weak Yen

The U.S markets showed no signs of resilience last week as the major indices plummeted to new lows. A shortened trading week turned out to be a sell off as the major indices dropped by over 6%. The banking system yet again hit the news as rumors of nationalization came out, extending the selling pressure. Recently-hit banks dropped by double digit numbers, as investors lost their confidence in the new stimulus plan.

On the Forex market the Dollar raced forward as economic data from across the globe hit investors, showing them that global economies still have further obstacles to overcome. European economies are showing a gloomy situation while Britain, once known for its high-held economy, is now dealing with currency erosion caused by a pessimistic economic outlook.

For over a year now, central banks from across the globe have engaged in an interest rate cut frenzy, to try to stimulate their economies, but unfortunately they haven’t been able to keep up with the market’s trend. Falling equities have caused central banks to lift their harnesses off the economy, slashing rates while pumping money into the system.

Cash Flow

When taking a walk down history lane, it seems like only yesterday Forex investors were racing towards higher interest rate currencies trying to grab the next up trend. Countries like Australia, New Zealand and Britain were presenting phenomenal returns, while even the U.S, a country reaching only a 5.25% yield, managed to attract investors. Some used to call it a “buy and hold” strategy or “a carry trade”. Investors became familiar with the various traded asset’s directions, knowing that- as stocks go up, so do particular currency pairs.  It all made sense; Investors knew that If stocks were gaining strength, central banks were more than likely increase their rates to control the level of growth, hence making their currency gain value against other low yielding ones. During that time carry trades also became a popular form of trading as large corporations raced to grab interest rate differentials, between high yielding currencies and low yielding one; like the Japanese Yen. Currency pairs like the USD/JPY increased enormously in value due to the increase in demand.

As the housing bubble burst towards the end of 2007, stocks began to plummet. Interest rates quickly followed, while the expectation of lower rates dragged along currencies.  By taking a glance at the chart below we can see a mirror-like resemblance. Throughout the years, the Japanese yen traded in a negative correlation to the S&P500, meaning that as stocks increased currency investors went haywire, selling low yielding currencies and buying higher yielding ones like the USD. As stocks began to drop, money sailed back into the Yen or other low yielding currencies, as those same investors closed their positions, taking their profits. By taking a brief glance at the USD/JPY one can also see that the chart resembles the S&P500.

Why aren’t currencies now going in their expected direction?

For a couple of weeks, dodjit’s market briefings have been stating that a divergence between the USD/JPY and stocks has begun to occur. While one might think that risk appetite is slowly developing in the markets, stock movement is painting a completely different picture. The Dow industrial average touched its 2002′s lows last week, while other indices dropped to prior lows. Funny enough the USD/JPY is gaining value.

One must remember that the USD/JPY can gain due to many different reasons, for example Japan’s economy could be in a more severe situation than the U.S, therefore forcing the USD/JPY to rise, despite the U.S’s pessimistic outlook. Or in other words, the Japanese Yen is devaluating at a faster rate than the USD.

By comparing the two currencies to a neutral asset, such as Gold we can see that while the USD has decreased by 18% in Gold value since mid January, the Japanese Yen has dropped by over 23%. Deterioration in the Japanese economy and a pessimistic GDP outlook has shifted sentiment towards the least drowning currency – the USD. One must note that while many consider the Dollar to be a strong asset, chart analysis is telling us that it is receiving its strength due to the fact that it seems the least of two evils.

Where to now?

By taking a glance at this pair, one can see that the price is now trading around major resistance. In addition, when analyzing the Dollar index more thoroughly, one can see that it has now touched major resistance and is holding firm on trend line support. Should the Dollar index drop, increasing momentum could cause the USD/JPY to lose strength despite a weakening Yen.

One thing is for sure, it will be interesting to see if the USD/JPY and the USD index remain correlated, especially as investors know the state of the Japanese economy, but are quite unsure regarding the U.S’s.

*charts are courtesy of stockcharts.com and netdania.com

Information reliability and liability: The contents are solely aimed for the use of “Experienced” investors in the financial markets who are fully aware of the inherent risk of trading. dodjit does not accept any liability for any loss or damage whatsoever that may directly or indirectly result from any advice, opinion, information, representation or omission, whether negligent or otherwise, contained in our trading recommendations. I make no warranties or representations in relation to the Information (including, without limitation, in relation to its accuracy or otherwise) and do not warrant or represent that the services will be error free or uninterrupted. Copyright: This article is subject to and protected by the international copyright laws. Use of the information brought in this article is subject to making fair use only in accordance with these laws. It is not permitted to copy, change, distribute, or make commercial use of the information except with permission of the holders of the copyright. Risk Disclosure: The risk of losses involved in the transaction or speculations in the financial markets can be considerable. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. Speculate only with funds that you can afford to lose.

About the Author

Dodjit was developed to unite traders worldwide. Dodjit.com also offers a Trading Courses ,Forex reports,Stocks Analysis,Forum,Currency trends and much more.

Australian Business Forum – Andrew Bassat

Corelle Livingware 16-Piece Dinnerware Set, Service for 4, Classic Cafe Blue $23.79 This classic pattern of blue bands in a cafe style look coordinates equally well with both contemporary and traditional home decors. Color is white with blue bands. 16 piece set includes: (4 each) 10 1/4” dinner plates, 6 3/4” bread/butter plates, 18 oz. soup/cereal bowls, and 11 oz. stoneware blue mugs….

Ambient Weather WS-2080 Wireless Home Weather Station $129.95 Features: USB port for easy connection to your PC All the weather data from the base station and weather history data with user adjustable measuring intervals can be recorded and uploaded to your PC Free PC software for transfer weather data to PC Rainfall data (inches or millimeters): 1-hour, 24-hour,one week,one month and total since last reset. Wind chill and Dew point temperature display (…

Mechanix Wear Mechanix Original Gloves $24.95 Mechanix Wear Mechanix Original Gloves Manufactured to handle the toughest work you can throw at it, our Original Glove continues to stand the test of time. With improved Clarino OW-927 synthetic leather palm, index, middle and ring fingertips, it repels 25% more water and oil preserving the life of the glove. The low-profile TPR Thermal Plastic Rubber hook and loop cuff closure, along with th…

Karcher WV50 Lithium Ion Cordless Electric Window/Flat Surface Vacuum $69.99 Includes Cordless Lithium-Ion Window/Flat Surface Vacuum – WV50, Lithium-Ion Battery, 12V Wall Charger, Operating Instructions…

Caesar 2.0 Love Machine 110V, Pink $1,678.57 Comes with a realistic 7- (18 cm) flexible but firm CyberSkin- dildo for women and realistic CyberSkin- vaginal masturbator for men. Flat base designed to slip between mattress and box spring. From 0 pumps per minute to 130 pumps per minute max. Barrel made of high strength, light weight aluminum and is easily removed for incognito storage 180 degree barrel angle adjustment with simple handle …