March 17, 2011

Will The Repatriation Trade Continue?

Somewhat counter-intuitive considering the vast economic toll caused by the recent earthquake, the Japanese Yen rose to an all-time high against the US Dollar on Wednesday. We examined the initial reaction in the currency markets right after the Japanese Earthquake hit last week.  The rationale for the strength of the Japanese currency was seen in anticipation of massive repatriation of Japanese investment funds from overseas.  Wednesday saw a market movement along similar lines but perhaps from a different motivational point of view.

The US Dollar dropped 300 points within a matter of 15 minutes, only to pull back to where it had started from.

USD-JPY 5 min Chart

The brief market episode which played out during early Asian market hours was not motivated by repatriation of investment funds but rather by speculative objectives.  This is clearly territory of market technicians and chartists. As soon as the previous support at an all-time record of 79.75 was broken, speculators had a brief but violent field day, possibly reversing the trade within the hour.  If you wonder where that massive support line comes from, you have to go back all the way to 1995 when the Yen had its previous record against the US Dollar.  Incidentally, that record occurred a few months after the (in)famous Kobe Earthquake which happened on January 17, 1995.

USD-JPY Monthly Chart

While we cannot draw any conclusions from these two seemingly coincidental occurrences, we can, however, infer that the current level is not likely to remain for a long time.  I am not suggesting that history will repeat itself in the same way as in 1995.  But in my opinion, there is a high probability that an exchange rate around ¥80 to the Dollar won’t stay here for long.  Too many fundamental and technical factors speak against a narrow trading range.  It will be an interesting ride ahead and it might get slightly bumpy.  Considering we are extremely close to the proverbial fork in the road, an option strategy that plays into both possible scenarios might come in handy. 

And as the world’s attention remains glued to Japan, another extremely low-yielding currency has made a near identical movement against the US Dollar.  The Swiss Franc, also a traditional safe-haven currency, has quietly made its way to successive new records against the US Dollar. On March 17, the Swissie reached an all-time record of 0.8860 against the greenback.

USD-CHF Monthly Chart

In view of this, the repatriation trade may have just accelerated a trend that’s already been there for a long time and it raises yet another question: Is the Japanese Yen really that strong or is the US Dollar showing continued signs of losing more of its safe-haven status?

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