Reactions to the Japanese earthquake last week have been fairly predictable so far in the financial markets – equities have sold off sharply with shares in uranium miners falling, while natural gas futures and oil have risen. Insurance stocks have also suffered but Japanese builders have gained. For forex traders the picture is still unclear as this risk aversion in equities has, so far, not translated into any meaningful US dollar strength. Indeed, the dollar index continues to fall and trade in the 76 region and is now perilously close to last November’s low of 75.63. This level is also key because should prices hold then we could see the formation of a strong double bottom pattern on the weekly chart and perhaps the start of a renaissance for the US dollar.
For the Yen, many traders are looking to the earthquake that destroyed Kobe in 1995 where it was a case of short the dollar yen and expect a bumpy ride. However, the Kobe earthquake was in January whereas the present disaster has happened just before the end of Japan’s fiscal year which normally means the repatriation of profits earned overseas. These overseas earnings must be converted back into Yen, as exporting manufacturers top up their profits in Tokyo, and such flows have usually resulted in a boost to the Yen. However, to these flows must be added the cost of rebuilding after this present disaster which, according to experts, the cost of rebuilding is likely to require the sale of some $1.25 trillion in offshore assets adding further upwards pressure on the currency. However, the BOJ has already stepped into the market and indicated that it will do whatever is necessary to rein in the strength of its currency.
At the moment currency markets cannot make up their minds whether to trade the yen on the back of further BOJ stimulus, implying a weaker Yen, or as a safe haven implying a stronger yen. In the short term the result of this indecision will be much greater volatility but medium term the bias is likely to be a weaker Yen given the BOJ’s determination to protect the Japanese export market as the country endeavours to recover from the catastrophic events of the past week.