The Forex Report

There’s no change in the plight of the Japanese economy. All the economic releases over the past week have only confirmed the likelihood of the worst recession since 1945. Nationwide department store sales have dropped by 11.4 percent, supermarket sales by -5.4 percent over the past year and we’ve seen the BSI manufacturing leading indicator collapse to -66.

The outlook for economic releases is equally depressing over the coming week too. The merchandise trade deficit is forecast to be around 300 billion yen.

However, as you have probably seen the yen’s value has risen against the dollar, at one point touching the 93.54 level.

This was triggered by the Fed’s announcement of a $1.2 trillion… yes that’s 12 zeros, the equivalent of one million million… And this is in addition to Obama’s $787 billion, stimulation package. What’s more, Congress is forecasting a budget deficit of $1.8 trillion. No wonder long-term interest rates soared higher by 0.6 percent to 3.1 percent as investors eye inflation as the next battle.

And now we have Obama’s head of the White House’s economic council saying that she is incredibly confident that the US economy will bottom out by the end of this year. Hang on… didn’t US officials state their confidence in a recovering economy two years ago?

One really does wonder whether we should just take what they say with a pinch of salt. If no one predicted the current problems then can they really predict when they’ll end? I’m afraid they’ve burned their credibility bridges a long time ago…

While the yen gained against the dollar it has lost ground against the European currencies with Japan’s plight seen as far more serious than that of Europe.

However, I’m doubtful that the trend against the Europeans will continue this week. The dollar’s ungainly plunge against the European currencies has been very strong, a 10 percent gain in only 3 weeks. There may be just a little more room for gains but we are due a correction as the dollar bear’s juggernaut does seem to be running out of fuel.

I feel this may well prove to be the same for the dollar’s value against the yen.

However, in my world of analysis which doesn’t really take any notice of all the economic noise the dollar-yen exchange rate hangs in the balance. Last week, I mentioned that the 94.69 level was important and we saw this surpassed quite easily and beyond my reserve support at 93.89. It is a very deep correction to the move from the 87.10 low and if we see any move much below 93.54 the risk will be significantly dollar bearish.

So the first few days of this week are going to be crucial and possibly Wednesday’s merchandise trade balance could have a say in the outcome if it exceeds the 300 billion yen forecast deficit.

I still have a slight preference for the yen to weaken against the dollar as long as the European currencies also begin to weaken. Overall I am expecting a cycle high in the dollar next week and again, as mentioned last week, I still have this 102.50 target which I would like to be reached first.

However, the dollar reached its highs against the European currencies much earlier than I had expected and with the dollar’s larger monthly cycles pointing sharply lower the larger risk over a 6 month time frame is significantly Dollar bearish. It’s going to happen soon. Perhaps it will happen sooner than I had expected.

Therefore, I’m sitting on the fence for the next few days waiting for the next move that will clarify what is happening. However, I don’t expect the yen to weaken considerably against the Europeans and may well be limited to today.

Next week’s the end of the financial year. That is when the fireworks may well begin.