Yen is trading cheap

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FX Trading ??� Yen is trading cheap

From Bloomberg today:

??? ???The latest rate increase ???will have next to no impact on the Chinese economy,' said Julian Jessop, chief international economist at Capital Economics in London. ???A stronger currency still has an obvious role to play in keeping inflation low and rebalancing the economy towards consumption.??�???

??? ?????�The ultimate solution to stemming this liquidity expansion is to increase the flexibility of the yuan,' said Ha Jiming, chief economist at China International Capital Corp, the nation's largest investment bank.???

??? ???Higher borrowing costs ???are not being effective in slowing down the economy,'' said Jim O'Neill, Goldman's chief economist. ``They need to do more by allowing the currency to strengthen.??�???

From Gavekal today:

??? ???But that would be to forget that the Chinese leadership is fundamentally Marxist, at least in its interpretation of History. Indeed, if they have any belief at all, Chinese policy-makers are probably convinced that most revolutions/revolts (France in 1789, Europe 1848, Russia 1917, Tian An Men 1989??�) tend to occur after periods of weak harvest and higher food prices. This is why the government stepped on the brakes in 2004 (see China??�s Policy Makers Next Move) and why it is doing so again today.

???In the last weak harvest period of 1999-2003, the combined grain output of China fell 70 million tons. Chinese food prices duly started rising - a true problem since, in China, spending on food accounts for 40% of the median Chinese family??�s income. But interestingly, food price inflation did not take place where one would have expected, namely the cities, but instead took place in the poor country-side. Why? Because in periods of shortages, it is easy for the government to buy grain abroad and distribute it in the main cities. However, because of a lack of infrastructure, distributing the grain in the countryside is far more challenging.???

[Our emphasis??�]

If rising interest rates won??�t hurt or slow significantly the Chinese economy. And if Chinese policy markers do want to make imported food costs cheaper for all, then a rise in the yuan might be a way to do it.

The Singapore dollar is tracking closely to the yuan as you can see in the chart below (yuan black line and Singapore dollar blue line). The Japanese yen (red line in chart) is not tracking closely with the yuan??�we think that will change.

CHART

Besides the potential for any benefit the yen might receive from a rising Chinese currency, we think the yen is trading cheap against the US dollar given a US slowdown and Japanese growth.

Jack Crooks, Black Swan Capital Black Swan Subscription-based Service