Yen: What next? Iran's role
Summary
Some time ago we warned that "karaoke politics" would dominate the Japanese stage. Well, it has: the place has gone nowhere in a hurry. Today we study the next round of such politics, as it pertains to the yen, tie this in with looming events in Iran, and then suggest how to make money off this in the near term.Topics Covered
- What has changed
- What has not changed
- Market implications & Iran
- How to make money off this idea
Background
- What has changed
Nothing, really. Oh yes, Naoto Kan has replaced Hiroshi Fujii as Finance Minister. And Mr. Kan has gone public by saying that he wants a weaker yen. But, then, Mr. Fujii - under pressure from exporters - was saying this, too.
2. What has not changed
Interconnectedness. Had we suggested a decade ago that markets were to tumble on account of the Chinese marginally raising the rates on the auctions of their 90-day Treasury Bills, we would have been declared stupid. We have nothing against this declaration; however, we would add that more globalisation via the internet and telecoms has produced such volatility whereby the tail is wagging the dog. And volatility "wags" the yen: the less "wagging", the weaker the yen, and vice versa.Volatility peaked at the end of last October, and currently nearly has halved, according to the VIX index.
Some back of the envelope calculations in today's Financial Times (FT) suggests that a fall of five yen against the dollar -
- boosts exports by 0.7% in the first year, and 1.5% in the second year, and
- pushes GDP by 0.2% in the first year, and by 0.3% in the second year.
3. Market implications & Iran
The point being made is simple: for now, the yen will remain weak because Naoto Kan is playing ball with the Bank of Japan, the BoJ: both sides want a cheaper yen. Already last year, the BoJ introduced an US$108 bn lending programme. Its aim is to inject ultra-cheap funding into the Tokyo money markets until this Spring. With the Finance Minister now publicly endorsing a weak yen yet again, this suggests that the BoJ and the Finance Ministry (traditionally in charge of the currency) will both seek to keep the yen weak.
Another factor driving down the yen will be the continuation of lower market volatility - for now. In such a subdued market, carry trades using yen as the currency of funding become attractive.
Another factor keeping a lid on the yen has to with Iran. According to said FT, "At the United Nations, ambassadors from the permanent five security council members are preparing to negotiate a new round of sanctions, with the debate set to reach a head next month." This means that we can expect some political fireworks in February - ones which will drive up gold and the dollar, traditional safe havens. Obviously the yen will fall when the dollar rises.
4. How to Make Money Off This Idea
- Always consult your financial adviser first.
- Buy the Australian dollar and sell the yen: rising rates on the Aussie will make this an ever-more attractive currency, particularly for the Japanese and our carry trade fans.
- In light of Iran shenanigans this February, use the yen fund purchases of gold. It will rise for two reasons: the dollar will strengthen, and the value of gold itself will strengthen. (The tricky bit is that gold is priced in dollars, so it is tough to differentiate between the dollar and the metal component of the rise in the price of gold.)
