A Tale of Three Currencies

11/14/2014 12:01 am EST


Jim Jubak

Founder and Editor, JubakPicks.com

The sharp drop in the Japanese yen has exceeded many targets for 2014, says MoneyShow's Jim Jubak, but the ripple effect on world markets is what to watch in the week ahead.

For the week ahead, it's going to be, again, a story of the dollar, the euro, and the yen, but most of the attention is going to be on the yen because that's where it's going to be most dramatic.

What we've seen is the yen go down to $116 to the dollar. We're talking about $105 and $110 being sort of the imagined end points for the yen in 2014 but forget about them. Now, we're looking at, will the yen drop to $120 to the dollar, $125. What's going on is that it looks like the Abe government, Shinzo Abe's government, has basically decided that they made a big mistake back in March when they decided that they would make an effort to not balance the Japanese government budget, that's impossible, but to shrink the deficit by upping the national sales tax from 5% to 8%.

What that did is it, pretty much, stalled the Japanese economy and all of the good things that the Bank of Japan had done by stimulating the economy by reducing the value of the yen, letting it fall, buying more assets on the open market, all of that came to an end and growth and inflation growth in Japan came to a halt.

Now, the plan was to do a second round of tax increases to take the national sales tax from 8% up to 10% in the fall, in Octoberish, like now, and, now, it looks like, well, the government is rethinking that, saying that basically growth is so slow that doing a second round is going to take a stalled economy and make it a sinking economy.

The market, on November 11, decided that there wasn't going to be as second round of tax cuts, sent the yen through the floor, and it looks like, at least, that they might delay this. The more thought about that, the weaker the yen gets to be, the stronger the dollar gets to be.

The euro is probably inclined to follow the yen downward, at least it's not going to show a big rally against the dollar. It looked like it was stabilizing and it may be $1.24 to the euro, it may go a little lower, but we're not going to see a big rally so the story is going to be how strong the dollar gets, how weak the yen gets, and how much that drives US markets higher from what's already an all-time high.

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