Yen breaks below 100 to the dollar barrier--rally in Japanese stocks to continue

05/09/2013 4:10 pm EST


Jim Jubak

Founder and Editor,

The Japanese yen has broken through the 100 yen to the dollar barrier. Rather convincingly too. The dollar was up 1.6% against the yen as of 3 p.m. New York time.

I’d assume there are a lot of positions and programs in action at this level so we might get a wash of buying as computers decide to close short positions or a wave of selling as traders figure that it’s now safe to go even shorter on the yen.

But whatever the short-term backing and filling, I think the barrier has finally fallen and the next stop is around 105 yen to the dollar. (Remember that because this exchange ratio is quoted as yen to the dollar, a higher number means the yen is weaker. It’s just the reverse with the euro where a higher number means it takes more dollars to buy a euro.)

The catalyst today seems to have been the better than expected report on initial claims for unemployment. For the week ended May 4, 323,000 workers filed an initial claim. That compares to 327,000 in the week before and the 336,000 consensus projection from economists surveyed by Traders put this unexpectedly positive report together with what the market saw as a positive April jobs report and decided that the U.S. economy was stronger than expected.

And they began to buy dollars and sell yen—and euros too.

What are the effects of this?

  1. Now that the yen has broken through 100, the next stop is 105. I think we’ll get there in rather quick order since everyone seems to agree that the Bank of Japan wants to take the yen down to that level or lower. A move to 110 is likely. Beyond that I think the market will have to worker harder and a snap-back rally is probable.

  2. The big rally in Japanese stocks on a weaker yen is likely to continue. A weaker yen means Japanese products appear cheaper to non-yen buyers and that Japanese companies translating sales from stronger currencies such as the dollar will show more yen on their income statements.

  3. A stronger dollar means even less pressure on U.S. interest rates. We are likely to see Treasury yields move even lower as overseas investors buy dollar-denominated assets.

  4. More downward pressure on commodity prices. Oil, copper, gold, etc. are priced in dollar so a stronger dollar means you need fewer of them to buy a barrel of oil, an ounce of gold, etc. Commodity stocks don’t need anything else leaning against them but a stronger dollar will exert downward pressure nonetheless.

Exactly how fast the yen moves downward will depend on how many positions long and short need to be resolved at this level. But I think we’ll move toward 105 pretty quickly. Remember how fast this move has been. The dollar is up 16% against the yen since the beginning of 2013.
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