Currency View
??? Market is dangerously mis-reading G7 Yen comments
For anyone to have expected a specific reference to the Yen in the final G7 communiqu?© was a big call. That just is not going to happen when Japan is a participant in the formation of the statement. It is not hard to work out that with a weakening Yen that Japan Inc just loves, that they will veto any direct reference that suggests the Yen should be stronger.
To have achieved a statement which signals the markets should recognize the good fundamentals of Japan, suggests other members of G7 pushed the Japanese delegation quite firmly to say something that would signal that Yen weakness has been overdone. Yet the market as a whole has read the communiqu?© as a green light to keep selling Yen, not G7??™s intention at all. Post G7 when asked about the Yen, members have made comments along the lines that the Japanese economy is strong, without specifically answering the currency question. It is likely that the Yen issue is a delicate one, but there could also be the geopolitics of a west friendly Japan wanting to be able to more successfully compete with the rise of China. That may explain why the US has been less forthcoming about the weakening yen than for instance Europe has.
What ever the realities of the conversations in the corridors of power, it is clear only Japan that wants a weak Yen, and they will let it fall as far as is diplomatically possible. For this reason the market will be selling Yen for the next few days, but at some point the diplomatic charade will begin to crack. We will again hear comments from Europe and parts of the US that the Yen should be stronger. This is likely to occur at the peak of Yen short positions, and the resultant recovery in the Yen will be as dramatic as any previously seen.
Technically the signal that such a scenario was coming to pass would be a move below support at USD/YEN 118.20. The early warning is at 118.80. For now the market is bullish USD/YEN and a break of resistance at 119.60, leading to a brief spike to 120.60 is a reasonable short term expectation. Please see chart on following page.
When the tide inevitably turns however, it is likely to keep flowing out, of the US dollar, for several weeks perhaps months targeting 108 by year end.