The world continues to anxiously watch as events unfold in Japan. First we had the horrendous earthquake, the fifth-strongest ever recorded. This was followed by the devastating tsunami which destroyed a tremendous amount of property and took a still-rising number of human lives. The scenes were surreal.
Just when we couldn’t expect it to get much worse, it actually did. The nuclear crisis was as unexpected as the natural disasters.
The radiation from the spent fuel rods and the partial core meltdown has scared the world and raised significant doubts about the safety of nuclear power around the globe. It has been a wake-up call for all countries that have nuclear reactors to re-assess safety protocols and question the reliability of nuclear generated power.
Unfortunately, the world can’t survive without nuclear power. The alternative sources are just not sufficient to replace nuclear power. So while it is a necessary evil, it is a good wake-up call for all concerned.
I have been trading currencies for more than two decades. And the most perplexing currency of all has been the Japanese yen. The yen has taken many proxies during the years. Nearly two decades ago, it traded along its fundamental strength when the Japanese economy was booming. Since then, it has swung to being traded for one proxy to another. A few years ago, the yen was the funding currency for the carry trades. (Sell the yen and buy the dollar).
When the carry trade died along with the financial crisis in the United States, the yen was bought back and the dollar sold. This led to unprecedented strengthening of the yen.
While this was logical, the economical fundamentals pointed to a very divergent story. The Japanese economy has been struggling due to tepid growth, deflation still holds a strong hand and the deficits have been out of control for a very long time. All signs should point to a declining yen. And yet, it jumped to 15-year highs.
Then comes the recent triple whammy and yet the yen shoots to its strongest levels against the dollar. This is completely against the logic of a devastated country’s economy being crushed by the effects of the disaster. The yen rises to its all-time high based on the logic of very large amounts of yen needing to be purchased by insurance companies to cover the losses they will face in Japan.
I am not a fan of any act that supersedes free market. And central banks have often wrecked havoc under the misguided notion of helping the economy when they have intervened in the currency markets.
But in this case, the G-7 central banks, in unison, had declared that they would intervene in the currency markets and stop the yen from gaining strength and keep the exchange rate to about 80 yen to the dollar.
This is a rare instance where I can stand up and applaud the central banks for bringing sanity to the currency markets. The greed of a currency trader who wanted to place himself ahead of the insurance-company trade isn’t only selfish but actually against the spirit of helping people in desperate need.
As a result of the unified announcement of the central banks, the yen collapsed to the 81-yen-to-one-dollar mark and is now steady at that level. The central banks' announcement has essentially drawn a line for the yen and its collective power has unnerved the most aggressive traders from making the yen gain any more strength.
In any case, like most times, the yen has really surprised the markets with its moves, which are quite contrary to the economic fundamentals of the times. Weakening due to the carry trades in 2007, strengthening when the economy was in dire straits in 2009 and really strengthening when the country has been devastated by earthquakes, tsunamis and nuclear meltdowns.
I foresee the yen around the 80 mark for quite a while now and this will be good for Japan and good for the world as Japan begins reconstruction. It will also be good for the world of currency traders as we ignore the yen and trade the fundamentals of currencies around the world.
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