Wednesday, October 15, 2008

On The Yen

"A strong yen is the last thing Japan wants..."

Tough Shit.

according to the Big Mac Index the Nippy is still 23% undervalued against the Dollar on a purchasing power parity basis (PPP). meanwhile the Euro is still 45% overvalued against the Dollar. the anomaly though is that a burger actually costs less in Australia than in Japan. so the AUD/JPY rate is quite intriguing. I'll have to look at that closer another time.

for now let's just look at the Dollar versus the Nippy and the Euro versus the Nippy. here is a monthly bar chart of the Yen/Dollar exchange rate:

we see that earlier this year the Yen broke out of the range established over the previous several years. then it dropped back down nearly to the middle of that range. recently it's been working its way back up again. if the Yen breaks above the high of earlier this year, then a price target of 115 to 120 seems reasonable. (keep in mind that this is JPY/USD rate, the inverse of what you'd trade on a forex platfrom. so JPY/USD at 120 would translate to USD/JPY at like 83 or something.)

furthermore I don't think that it's completely outlandish for the EUR/USD rate to eventually drop further. say maybe to the 1.15 or 1.20 range. might not, but it's certainly possible. so if the Euro goes down versus the Dollar as the Yen goes up versus the Dollar then it's possible that the EUR/JPY rate could go all the way back down to 100. if that happens the Global Financial Economy will have been converted into glass parking lot. that would mean the complete and utter unwinding of the last six plus years' of liquidity driven speculation. it won't be pretty.

but how likely is this? ah, it's hard to put a number on. but I can definitely visualise it. at this point all we can do is monitor the price action. I'll think about posting some more shorter-term updates for the Nippy as we go along.

edit: 'tough' replaces 'though'. boy, isn't that embarrassing!