Thursday July 7, 2005 - 11:54:55 GMT
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Yen won't rise until Oil falls
Has there ever been a more miserable time to be a yen bull? Certainly not this year. Despite the fact that Japanese economy continues to show improvement with every new release of data, USD/JPY is on a relentless march upward as candles methodically climb the Upper Bollinger Band forming yearly highs every single day. The reason for yen demise is twofold. First and foremost the expanded interest rate differential at 325bp has turned the pair into the carry trade du jour. The carry trade momentum has been further fueled by the rise in oil which hit a record high of $61.50 in Asia trade overnight. Because Japan imports 99.5% of its crude, the country is the most vulnerable economy amongst the G-3 nations to rising oil prices.
In the meantime, between tensions with Iraq, tropical storms in the Gulf and market’s sudden realization that Saudi Arabia may have already reached peak production capacity, the oil market itself has been under turmoil of almost Biblical proportions. Much hay has been made over the fact that there are now 6900 $80 December call options outstanding suggesting that market prices the possibility oil reaching $75/bbl by December at 21 percent. Yet we note that for all those 6900 buyers there is also a seller more than willing to bet that prices will come nowhere near that level. The oil bears main argument rests on the idea that as price rise demand from China will slow. In fact, demand has already slowed to 7% growth rate from near 15% pace in 2004. As demand wanes and prices begin to slip, the bears believe speculators and hedge funds which have flooded the market in recent months will liquidate in a hurry spurring even more downside movement. Whatever the scenario, one thing appears certain – until oil falls yen will not rise, today’s strong 10.6% year over year gain in Machine Toll order notwithstanding. Yen bulls may yet have their day, the only question remaining is whether they will have any capital left when the turn finally comes.
FX Spot Overnight
- EUR bounces to 1950 but sells right back to 1900
- JPY rallies to 111.90 on euro weakness
- GBP remains at 7550 as UK data neutral
- CHF flows euro weakness at 3060
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