Dollar and Yen on Fire, But For How Long?
By Ed Ponsi
The plunge in EURUSD has Americans everywhere asking one very important question: is it too late to catch a flight to Germany for Oktoberfest?
Greetings from London! We are living and trading in historic times, as the credit crunch has thrust the U.S. Dollar and the Japanese Yen into the stratosphere, while crushing the British Pound, the Euro, and other major currencies. To get a feel for the scope of this move, let's have a look at the monthly chart of the Great Britain Pound – U.S. Dollar chart (symbol GBP/USD). We can see that the GBPUSD rally, which lasted for the better part of this decade, has given back the majority of its gains in just three months. A drop of nearly 4000 pips has sent the pair crashing through all of its major Fibonacci support levels.
London is one of my favorite places to visit, but it's even more fun for an American like me when my currency has some real buying power. For example, a nice meal at the pub next door to my hotel still costs about 30 GBP, same price as usual. Last November, when the GBPUSD exchange rate was about 2.10, that meal cost $63 (30 x 2.10 = 63). Now that the exchange rate has plunged to 1.60, that same meal, as measured in U.S. Dollars, costs just $48 (30 x 1.60 = $48). Now take that meal and multiply it by all of the goods and services that Americans purchase from the U.K., and you get a feel for the size of this move, and the impact it has on these two countries.
Of course, the rise of the dollar is not contained to the British Pound; the rampaging U.S. currency has also undone most of this decade's Euro rally as well. The plunge in EURUSD has Americans everywhere asking one very important question: is it too late to catch a flight to Germany for Oktoberfest? Sadly, the answer is yes. If it seems like it's only been a few months since the once-mighty Euro was smashing it's way to new all time highs vs. the greenback, that's because it really has been just a few months.
The buck is rallying due to frazzled investors dumping shares and stashing the proceeds into U.S. Treasuries, one of the best ports for financial safety in any storm. When you buy a Treasury, you are really lending money to the U.S. government. The vast size of the U.S. government's debts makes for a huge, liquid market in U.S. Treasuries, where institutional traders can ride out the storm. For more on this topic, check out last week's article "Forex and U.S. Treasuries".
Although the USD has rocked the house recently, there is another currency that has been so strong, it has even beaten the buck. Of course I'm talking about the Japanese Yen, which has been on an incredible roll vs. the rest of the world. The Yen has performed particularly well against the Great Britain Pound, which comes as no surprise to regular readers of this column. Two weeks ago, we walked readers through a short sale trade of GBPJPY, and in an early September article we laid out the technical case for shorting this currency pair, followed by another article that presented a fundamental argument for selling it. Well, I don't think anyone could have anticipated what a fantastic pair this would be to sell short, as GBPJPY crashed to multi-year lows. Once again, thanks for your kind words and congratulations to all of you who shorted GBPJPY along with me
I'm sure many of us wish the GBPJPY Express would continue its southbound trek, but nothing lasts forever. While its way too early to call an end to the trend, its might be difficult for the Yen to keep this pace due to the threat of intervention by the Bank of Japan and other Group of Seven central banks. In other words, Japan is threatening to sell the Yen in massive quantities in order to weaken it, causing pairs like GBPJPY to rise. Because Japan has an export based economy, a strong Yen is bad for business, as big exporters like Toyota and Canon are losing sales due to the falling exchange rates of USDJPY, EURJPY, and GBPJPY. Japan may even get help from other G7 countries in weakening its currency, according to an October 27 statement from the G7 itself. This rare currency volatility warning by the G7 has been interpreted as a sign that Japan and others may step into foreign exchange markets and artificially force down the Japanese currency if the Yen continues on its current rampage.
"We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability," said the G7 statement. While this may sound innocent enough, the implications of the statement are huge. If Japan intervenes, the real winner will be the U.S. Dollar, the currency that the Bank of Japan (BoJ) is most likely to buy in mass quantity as it is selling Yen. If the BoJ starts pushing USDJPY higher, do not get in the way – in its last major intervention, the central bank caused USDJPY to climb about 700 pips over a three-week period in early 2004.
Last but not least, thank you for all your kind comments and emails regarding my recent series of appearances on CNN. Yes, it was a blast and as you can tell, I loved every minute of it.
Ed Ponsi
