Monday December 5, 2005 - 11:56:00 GMT
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Black Swan Capital - www.blackswantrading.com
A yen elixir for Asia?
“One can never be sure whether it is the expectation that corresponds to the subsequent event or the subsequent event that conforms to expectation. The segregation between thoughts and events that prevails in natural science is simply missing.”
A very interesting non-expectation that may have an underlying reason—at least a discernable one—is playing out before our eyes: The Japanese yen is tanking, while assorted other Asian currencies are doing just fine against the dollar.
The belief has been (and we were firmly within this consensus) an appreciating Chinese yuan would pull the yen along with it—it hasn’t. Why?
Others have talked about Japanese investors’ willingness to move money offshore for better yield now that their economy is “more normalized.” Okay, we knew that. But another subtle but very important point was made on Friday by Mr. Stephen Jen of Morgan Stanley that helps explain why USDJPY diverges as other Asian currencies track the Chinese yuan (and the appreciate against the US$ by default):
Asian ex-Japan (AXJC) is more “complementary” with China. “To the extent AXJC import Japanese capital goods and compete with China in the final goods market, a rise in RMB/JPY (i.e. the Chinese yuan value relative to Japan) is a positive terms of trade shock for AXJC, therefore supporting these currencies.”
In other words, if a country’s cost of import components for manufacturing falls (in this case the cost of Japanese capital goods is declining as the yen declines), then its export component can be maintained in the face of a rising relative currency value.
This leads to an important point about global liquidity. It points to why any decision by the Bank of Japan to raise interest rates (or at least end quantitative easing) could have at least or more important an impact on global growth than what the Fed is doing.
And if Japan is the elixir of liquidity in Asia, it might help explain why metals and gold are soaring in the face of a rising dollar. Just a thought!
Black Swan Capital
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