One Yen Barrier Down...

05/10/2013 5:00 am EST

Focus: CURRENCY

Jim Jubak

Founder and Editor, JubakPicks.com

The currency is not likely to see much resistance falling past 105 or possibly even 110 to the dollar, writes MoneyShow's Jim Jubak, also of Jubak's Picks.

The Japanese yen broke through the 100 yen to the dollar barrier. Rather convincingly too.

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 yesterday 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 Briefing.com.

Traders put this unexpectedly positive report together with what the market saw as a positive April jobs report and decided that the US 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. For two suggested picks, see my Jubak’s Picks portfolio for Toyota Motor (TM) and Mitsubishi UFJ Financial (MTU).
  3. A stronger dollar means even less pressure on US 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 dollars, 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.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund did own shares in Toyota Motor and Mitsubishi UFJ Financial as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio here.