-- Posted Wednesday, 20 June 2012 | | Disqus
Highlights
- Japan Trade balance (deficit) -907.3 bln yen
- Foreign investors' holdings of Japanese government bonds (JGB) rose to a record of nearly $1 trillion
The yen has been trading below 90 against the US dollar for more than a year. Japanese May month trade numbers reflect that all is not well in Japan. The deficit in the trade balance in May widened to 907.3 billion yen ($11.48 billion). Japan's economy grew an annualised 4.7 percent in the first quarter. Japan's debt burden, at twice the size of its $5 trillion economy.
Japanese growth rates are higher than USA or Europe which could be one of the key reasons for increase in foreign investment in Japanese government bonds. It’s more due to a safe haven demand. Investment pattern suggest that Japanese people and Japanese fund managers have invested in gold in quite a big way.
The chart above shows that there is an inverse correlation between gold prices and yen (usd/jpy). Zero interest rates have not worked for Japan. Traders and investors in Japan are more inclined to invest in overseas assets than domestic assets. Demographic changes due to an ageing population has also contributed to policy failure of the bank of Japan.
The bank of Japan in the past had tried to stem gains of the yen (usd/jpy) and has been unsuccessful in the past one year. Currency prices should reflect economic fundamentals whether its Japan or India. If they defy the fundamentals later than sooner currency prices will near fundamentals. Fundamentals of Japanese economy suggest that yen (usd/jpy) current price of 78.92 is no where near fundamentals. The yen will weaken over 90.00 either in 2012 or by first quarter of 2013 and break past 115 (against the US dollar) by the end of 2014. We believe yen prices defying fundamentals will not be sustainable for long. The only risk to my view is that of break up of eurozone and reduction in eurozone members nations as it could increase investment in Japanese government bonds. In our view this is the best time to short the yen and we do not expect it to fall below 68. The risk to return ratio is in favour of shorting the yen against the US dollar for an investment period of one year.
Impact on gold prices if the yen weakens against the US dollar
In the short term if the yen weakens against the US dollar gold prices could fall. But there are other factors like the eurozone mess and Iran which should limit any gold price fall.
Disclaimer: Any opinions as to the commentary, market information, and future direction of prices of specific currencies, metals and commodities reflect the views of the individual analyst, In no event shall Insignia Consultants or its employees have any liability for any losses incurred in connection with any decision made, action or inaction taken by any party in reliance upon the information provided in this material; or in any delays, inaccuracies, errors in, or omissions of Information. Nothing in this article is, or should be construed as, investment advice.
Disclosure: Insignia consultants or it employees do not have any trading positions on the trading strategies mentioned above. Our clients may or may not have positions on the trading strategies mentioned in the above report.
NOTES TO THE ABOVE REPORT
Yen in the above report implies prices of US dollar- Japanese cross (usd/jpy).
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-- Posted Wednesday, 20 June 2012 | Digg This Article
| Source: GoldSeek.com
