Japanese Yen Hits a 15-Year High Versus the US Dollar

I told you yesterday that the FOMC had set off some fireworks with their statements the other day, and those fireworks turned into a major sell-off in the risk assets yesterday… Stocks, currencies and commodities, all sold in a major way!

Stocks were down 2.5%, the euro (EUR) was down three whole cents, and gold lost ground… I would think that the 3-cent sell-off was a bit overdone… We’ll have to wait-n-see… But there was good news for Japanese yen (JPY) holders… The yen hit a 15-year high yesterday, when it traded, albeit briefly, below 85… I was a foreign bond and currency trader at the old Mark Twain Bank in 1995, and I truly recall when yen was 85 in 1995… I have to say that, in some ways, those days are very reminiscent of today… Like investors flocking to yen when yields are non-existent and the country is wallowing in deflation and a rising national debt…

That rising national debt has become a HUGE 800 lb. Gorilla for the Japanese… However, let me explain why their government debt COULD BE different than ours… You see, their deficit is internally financed… And… They have that HUGE trade surplus… But… It’s still debt that has to be financed… And, like 15-years ago, you scratch your head as to why investors are flocking to yen… Shoot Rudy, the boys and girls at Barclays believe that the only target left for yen is to reach 79.75, a post-war low versus the dollar…

I’ll say this about yen… It certainly seems as though the new Japanese administration isn’t so hell-bent on keeping the currency weak, for they have not mentioned once during this run by the yen, that they would consider intervention… But… One should always be aware that the Bank of Japan (BOJ) is ready and willing to intervene whenever they get the wink and nod from the Finance Ministry…

I’ll also say this about yen… Like in 1995 after hitting 85, the euphoria in yen didn’t last too much longer, and by 1998, it was 147… OUCH!

So… Not only was it a day when the risk assets got sold, it was a day that saw that the US trade deficit was $49.9 billion in June, which happened to be much wider than market expectations for a deficit of $42.3 billion. Exports fell 1.6%… Hmmm… Didn’t I tell you that eventually the dollar strength that we saw from November to July would take its toll on the trade deficit? Well, I would say that a 1.6% drop in exports would signify that toll, eh? And… Imports increased by 3%! I guess the US consumer isn’t dead after all!

But did that data stop the dollar in its rally tracks? Hardly… Merely a bump in the road…

So… Like I said above, the euro lost 3-cents yesterday, as it has started the day in the overnight markets with a 1.31 handle and ended the US session with a 1.28 handle… Folks… This has nothing to do with the Eurozone debt crisis… This simply is tied to the flight to safety that the markets feel need to be done after the FOMC statement basically sent out an SOS…

The Aussie dollar (AUD) got whacked too, but not only on the flight to safety…by the weaker than expected Jobs data revision, too… Here’s the skinny… Aussie job creation increased by 23,500 in July, which was better than expected… But… June’s number was revised downward… You see, apparently, these backward looking revisions get noticed in Australia, as opposed to the US…

And in the Eurozone this morning, industrial production for June printed soft, falling -0.2%, when the expectations were for an increase. Tomorrow, Germany, France, and Spain will report their first estimates of second quarter GDP… That should be interesting, eh?

I repeated over and over again for the past month, as the euro rose higher and higher, that it was not out of the woods, and that 3-cent drop yesterday sure illustrated that thought!

What did you think of that story yesterday regarding the new “buy and bail” routine that homeowners are doing? I think it stinks… I heard a story about a man that owned a house, and then got married, when his house lost it value, his wife went and bought a new house, and they walked away from the old house… On top of that, though, the wife, being a new homebuyer, received the $8,000 for being a new homeowner! There are a lot of things wrong with all that, folks. I certainly hope you agree!

So… Speaking of housing problems… It was long thought that the Northwest and Midwest were immune from the foreclosure problems that the rest of the country was experiencing… But according to RealtyTrac, Inc. foreclosure rates in Utah, Idaho, Illinois, and Colorado rose in the second quarter, and now rank among the 10 highest in the country! The number of homes seized by lenders doubled in 19 states and more than tripled in 7 states!

Last month, 325,229 US homes received a notice of default, auction or bank repossession… YIKES! This stuff is starting to get to middle America! And then there was this from The Wall Street Journal… “US banks made $1 trillion in home equity loans during the housing boom, and a huge amount of that is unpaid and largely impossible to collect because value has collapsed.”

And… There are still people that don’t agree with me on the at least 10% home price adjustment downward that is still to come…

Well… Let’s talk about something else… This housing stuff really depresses me…

The other currency that gets some love when the flight to safety gets going is the Swiss franc (CHF)… The franc had taken a backseat to the other currencies in July, as the euro, Aussie and Canadian dollars (CAD) all rallied versus the dollar. But, as I look at the currency screens today… I see that yen, francs, and Mexican pesos (MXN) are the only currencies rallying versus the dollar.

Gold is rallying this morning, though, after selling off yesterday. Gold is back above $1,200 at $1,204 this morning. Now, that’s one flight to safety investment I agree with! It’s the only one, though… But, you don’t throw yourself in front of a bus when this stuff is going on… You either batten down the hatches and look for bargains, or… You panic, sell, catch the falling knife, and buy dollars, yen, francs or gold…

With it being a Thursday we’ll see the latest Initial Jobless Claims, which should remain above 460,000 for last week… With the continuing claims remaining at a very high level…

Tomorrow’s data cupboard brings us the stupid CPI… But also the retail sales for July, which according to the BHI, should be a bit better than recent soft retail sales prints… And that increase in retail sales would play well with the increase in imports that were seen in the trade deficit data we went through above.

Then there was this…

Alabama $60,672,471
California $476,257,070
Florida $238,864,755
Georgia $126,650,987
Illinois $166,352,726
Indiana $82,762,859
Kentucky $55,588,050
Michigan $128,461,559
Mississippi $38,036,950
Nevada $34,056,581
New Jersey $112,200,638
North Carolina $120,874,221
Ohio $148,728,864
Oregon $49,294,215
Rhode Island $13,570,770
South Carolina $58,772,347
Tennessee $81,128,260
Washington, DC $7,726,678

This is the list of states that will receive funds from the government to aid their unemployed homeowners from having their homes foreclosed on… The total is $1 billion…

To recap… The flight to safety is back on in a strong way, slamming the risk assets of stocks, currencies and commodities big time, yesterday. The euro lost three cents in a 24-hour period. The Japanese yen hit a 15-year high yesterday, and if the flight to safety continues for any extended time period, we could see yen reach its post-war high versus the dollar. Swiss francs and gold also represent destinations for the flight to safety campers, and both are stronger this morning.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning