The first quarter of 2009 is coming to an end and as of March 20, 2009, when one looks at three major currencies vis a vis the U.S. dollar, it is clear that the greenback is looking better than at this time last year, despite the revving of the Fed’s printing presses and the inflationary concerns that come with that. In the case of EUR/USD, we were testing 1.60 repeatedly a year ago vs. a closing price of 1.3580 on March 20, 2009.
The British pound, which hit 2.1185 at the beginning of November 2007, stayed comfortably around 2.00 against the U.S. dollar for the first six months of 2008 and the Japanese yen went from 102 to 110.73 by the middle of August 2008 before it made a double bottom just above 87.00 at the end of 2008 and beginning of 2009. In the last five months of 2008 the yen was the king of the hill and it absolutely decimated carry trades that were so popular with Japanese housewives, New York hedgies and City of London bankers who thrived during better years when the financial markets and their gurus did not know how to spell risk and even worse how to price it.
EUR/JPY went form 1.6996 to 112.05 and the cable (British pound) fell from the carry trade Mount Everest of 216.00 to the depths of 118.50. One thing is certain, currency traders cannot complain of a lack of action and trading opportunities. There are a few trades that come to mind as we near the second quarter of this year.
Let’s look at USD/JPY. The Federal Reserve’s decision on March 18 to use quantitative easing to turn around the U.S. and global economies, and in the process convince the financial markets that the worst is over, met with a seven handle rally in 30-year U.S. Treasury bonds and a uniform route of the U.S. dollar. The Euro had the best 24-hour period against the greenback and again we are hearing calls for the demise of U.S. currency. I beg to differ! One cross that offers great opportunity is USD/JPY.
Fundamentally the case is quite clear. Japan has been mired in a 20-year recession with few sunny days and with unfavorable demographics. The population of Japan is quite old with more people retired or approaching retirement age than any other G-7 country. Domestic consumption that has been stagnant for many years does not look to change significantly for the better in the future because of a declining work force. Japan’s government debt is at 170% of its gross domestic product, much higher than its counterparts in G-7 and Japan’s GDP shrank at an annualized rate of 12.1% in the fourth quarter of 2008. The Bank of Japan surprised the markets with the massive monthly increase of 1.8 trillion yen ($ 18.3 billion) purchases of government debt from Japanese banks. It is quite clear that quantitative easing has become a major tool employed by the Bank of Japan, Federal Reserve, Bank of England and even the Swiss National Bank, which recently purchased francs in the open market.
While it may look like we missed this opportunity, the USD/JPY could retest the March sell-off, which stopped just above the 50% retracement from the January double bottom to its March 5 high (see chart below). Buy the USD/JPY at 93.50 with a stop at 91.00. Our bullish outlook would not be changed until/unless that double bottom is taken out so you could double up at 91.00 if you can stomach the move.
If the yen does not give us that opportunity by testing the 50% retracement level, another play would be to get long above the March 5 high. A move above par could signal a larger move towards 105.00 and you could set a much tighter stop/loss on your long position. If the market does allow you to get long at 93.50, you would add to that position on a move above par.
