Currencies Are Piloting The Ship And Gold Is Profiting

All eyes are on the yen, which has become far too strong for the good of Japan and perhaps for the world. It is not only the strengthening of the yen against the U.S. dollar, in particular, but the astronomically fast pace of the rise that is scaring the financial world.

On March 28th, the yen closed at 113 against the dollar. Today in mid-afternoon trading that number is 108. The currency markets are the biggest and most lucrative in the world and the yen/dollar, euro/yen and dollar/euro pairs are the most actively traded (generally speaking).

A stronger yen obviously hurts Japan’s exports by raising prices on the country’s goods. But it also prevents repatriation of earnings that Japanese corporations make in other countries, and even more importantly, it tempts the Bank of Japan to move further into negative rates territory.

Why is that crucial? Because it damages the profits of big banks and other kinds of financial institutions and that smash up shows up on their bottom lines. And what shows up on bottom lines eventually shows up in stock prices.

That uncertainty – that volatility – engendered by currency instability is one of the reasons that gold is performing so strongly today. The yen is normally a haven currency, but having soared so high so fast leaves it vulnerable to profit takers and possibly even intervention on the part of the BoJ.

So, gold, which is up $17 at 3PM in New York, seems like a natural place for money to migrate to today. Silver and platinum were also high flyers on the trading session.

Another haven play, the U.S. 10-year bond, is also strong today, the yield tumbling below 1.7% as we compile our daily analysis. That means there is more interest in the bonds even as face price rises.

U.S. and European equities are seeing some damage today. Their declines are due to the aforementioned financial sector’s struggles and oil’s step back from yesterday’s massive up-move. Asia saw some strength. Although Shanghai was down, Hong Kong and the Tokyo Nikkei, surprised, moving up slightly in spite of the yen’s robustness.

Not to belabor a point, but the frisson of fear that the yen (and to some extent the euro) is causing stems from something other than a sky-is-falling mentality. Underlying the worries is a sense that in Japan and Europe at least, the efficacy of monetary policy may have come to an end.

Taking that one step further, the markets are saying that monetary policy has limits and that they do not trust policy making (or lack thereof) from legislators across the entire world economy.

We’re hoping and making a small bet in our minds that the yen is going to get cut down to size soon, even if only through the Bank of Japan’s talking it lower.

However, the question of the limits of monetary policy is a key one. If it begins to fail in the United States, we will be in for a very rugged ride indeed.

Wishing you as always, good trading,