Strong Yen Brings Predictable Response from Japanese Officials

The risk aversion fog that drifted over the currencies yesterday has remained in place this morning, with just faint signs of lifting here and there. The Japanese yen (JPY) moved back to its 15-year high level versus the dollar yesterday, and the Swiss franc (CHF) pushed above 99-cents on its way to parity with the dollar.

This morning, German exports slid in July by 1.5%… I attribute this slide to the strength of the euro (EUR) this summer… I know, I’ve had economists tell me that it takes months for a currency’s value to show up in a trade report… But I say hogwash! Everyone is “connected” these days, and knows what’s going on, and when they see a rising currency, they either hedge their transaction, buy more now, instead of the future, or… Just back away and let the dust settle… That’s my view from the cheap seats!

I saw a report last night from Morgan Stanley that changed their outlook for the euro versus the dollar…  A few months ago, they forecast that the euro would end the year 1.16… But now, seeing the US’s probability of more quantitative easing, they’ve changed their forecast and believe the euro will end the year at 1.36… WOW! Now that’s quite a change, eh?

Last night, the risk aversion fog lifted over Australia, and the Aussie dollar (AUD) is nearing its four-week high versus the US dollar. Tonight we will see the color of the latest Aussie employment data. I expect this to be a very strong report, which will probably beat the forecast of +25,000… I think it could be as high as 45,000, and maybe 50,000… If that’s the case, I think we’ll see the Aussie dollar punch a hole right through this fog, and climb to 92-cents.

And in Japan, where the yen hit its 15-year high versus the dollar again, it’s the same old song sung by Japanese officials, as they attempt to jawbone the yen weaker… The Japanese officials have done it so often now, that it’s like the boy who cried wolf… Memo to Japanese Officials… The markets aren’t paying attention to your warnings that you’ll take “bold actions”… If you want to take “bold actions” then you had better do it, and stop talking about it! My dad used to tell me… Money talks… Bull… Walks…

Then there was this from The Washington Post this morning…

As Democrats and Republicans argue about the economy, they are ignoring the fact that the disappearance of 8 million jobs relates to factors that are more structural than cyclical, business columnist Steven Pearlstein writes. For decades, the US has allowed its industrial and technological base to deteriorate, and fiddling with government spending won’t change that. “In this election season, the politicians who are really serious about creating jobs and bringing down unemployment won’t be the ones screaming about tax cuts, or stimulus or some imagined government takeover of the economy,” Pearlstein writes. “They’ll be the ones talking about how to make the American economy competitive again.”

Unfortunately, I don’t think we’ll hear any of that talk, because of a number of reasons…

To recap… The risk aversion remains over most currencies this morning. Australia punched a hole in the risk aversion fog and will look to climb higher after seeing their latest employment data this evening. Germany’s exports slid in July, and Japanese officials still believe they can stem the yen’s rise with meaningless talk…

OH! And one more thing… Silver climbed back to $20 yesterday, lost the handle and then rallied back…. Now, silver needs to remain above $20, and add to that handle!

Chuck Butler
for The Daily Reckoning

The Daily Reckoning