After a three-year hiatus, Japan’s LDP party returned to power in Sunday’s elections. Yohay Elam of ForexCrunch.com offers a preview of what to expect from various global currencies.
After discussing the long-term effect for the Japanese yen, it is time to discuss potential currency reaction after the elections. It is still hard to tell if a weaker yen, which Japanese officials wish for, will happen so fast.
However, given the current situation, we could see the yen bears finally taking over. If this is the scenario, which currencies will gain?
AUD and NZD: Buying these currencies and selling the yen was the classic carry trade up to the financial crisis, as these countries had very high interest rates: New Zealand had a rate of over 8% at one points. Both countries still maintain an above 0% interest rate (AUD: 3%, NZD: 2.5%), but their prospects aren’t that promising. They would rise nicely against the yen if the global economy, and especially China, were producing convincing growth.
CAD: Long CAD/JPY was eventually the best trade of November. Assuming ongoing growth in the US, but without any sparks, the yen could lose more against the loonie than against the dollar: Canada needs a stable, growing US for its demand.
EUR, GBP, CHF: These European currencies would gain against the yen as long as the global economy is stable, yet to a lesser extent that the Canadian dollar in case of modest growth, and less than the Aussie and kiwi in case of strong growth.
USD: In case of more sluggish global growth or in case of a US recession, the yen would still be sought after as a “safe haven” currency, slowing its fall especially against the risk currencies. In this case, the US dollar would be a better trade against the yen, as it also carries the safe haven currency status.
It’s important to note that not all is bad in Japan: unemployment remains very low and industrial output showed a surprising rise recently. Despite the high level of debt, the talk about two lost decade and all the aforementioned problems, Japan offers a very high quality of life for its citizens.
A drop in the value of the yen would help Japanese exports, yet these stronger exports aren’t likely to produce a quick counter effect against the rise of the yen.
By Yohay Elam, Founder, Writer, and Editor, ForexCrunch.com