The dollar sold off hard yesterday and we finally saw it weaken substantially against the yen, losing three cents in a two-day period. I would like to say the entire trade was a yen story, but it was not: the greenback weakened pretty much across the board. Even the "commodity currencies" -- the Australian dollar (AUD) and the New Zealand dollar (NZD) -- recovered after a two-day drubbing that had some thinking their recent rallies had fizzled out. No such thing. Another good jobs report out of Australia sent the AUD surging higher and NZD followed in sympathy. Furthermore the euro, which had been flirting with new, multi-year lows just a week before, climbed out of the basement and well above the $1.10 level in what can only be described as blistering short covering.
So what's going on?
I believe, as per my writings, that the Fed-rate-hike story is fully priced in and dollar buying is becoming exhausted. Add to this the fact that most market participants don't even understand the effect of rate hikes anyway or perhaps, I should say, falsely believe them to be bullish for the dollar when in actuality they are nothing more than fiscal expansions (real money printing) and constitute a net increase in the supply of dollars. The way I see it, the worst is yet to come for the buck.
My focus today, however, is again on the yen (JPY). The Japanese unit got violently kicked out of its sleepy trading range starting with a jolt of good economic news on Monday. Japan's government reported that the nation's economy didn't contract at all as was previous believed, but instead, grew at an 1.0% annual pace in the most recent period. The revision came as a total surprise and as I said, it knocked USDJPY out of its deadly quiet, 122 to 124 trading band.
While the economic news was a delight for yen bulls, it's not GDP that I want to discuss, but rather, oil prices. More specifically: how long was the yen going to ignore the total collapse in oil prices that we have seen in the last 15 months?
Historically, the yen and oil have been inversely correlated. In other words, higher oil prices were usually bearish for the yen and lower oil prices, bullish. The reason being that Japan produces no oil and tends to be a large net importer, therefore, higher prices tend to reduce Japan's normally large current account surplus, which causes the yen to weaken and vice versa: weak oil prices tend to sustain or even swell Japan's current account surplus.
The bearish impact of oil was even intensified since the 2011 Fukushima earthquake. I have written extensively on this. Oil imports threw Japan's normally positive current account into historic deficit from 2012 thru last year. That's because the quake led to the shutdown of the country's nuclear power plants. We finally saw the restart of a few of these plants in 2015 with more slated to come on stream over time. This was something that I said might end up being a bullish factor for the yen.
In addition, and this should come as no surprise, Japan's current account balance (in yen) has rebounded back to surplus.
With all these factors coming together, I can only say that the outlook for the yen is growing increasingly bullish. I think we could see a very sharp and sustained rally next year, and this recent breakout might be the start. The yen has a habit of making moves toward the end of the year. The massive selloff, which may now be ending, can be dated back to late November, 2012.