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Mad Hedge Fund Trader

Mad Hedge Fund Trader

John Thomas, The Mad Hedge Fund Trader is one of today's most successful Hedge Fund Managers and a 40 year veteran of the financial markets.…

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Why the World's Worst Economy Has the Strongest Currency

Why the World's Worst Economy Has the Strongest Currency

Global currency traders remain puzzled by the continuing strength of the yen (FXY), (YCS), which broke out of a ¥90-¥95 range a few weeks ago and insists on levitating around the ¥87-¥89 area.

Looking at the fundamentals, you would not pick Japan to possess one of the world's most virile currencies. It runs one of the planet's largest and most rapidly climbing budget deficits, suffers a demographic nightmare of epic proportions, and lives in the shadow of China, which surpassed it in GDP this year to become number two.

It produces a tenth of the Middle Kingdom's new per capita GDP. And the ruling Democratic Party of Japan (DPJ), which promised to weaken the yen, just took an absolute pasting at the polls.

The reason is simple: the fundamentals are so poor, that no one owns the yen, and therefore, can't sell it. Central bank holdings of the Japanese currency have been plummeting for years, and are now thought to be around 10% of the total.

Japan's 15 year old zero interest rate policy made it unattractive when the others were yielding 5%-6%. Now that all the major currencies yield close to nothing, the playing field is level.

While the government has been a massive issuer of debt, thanks to the country's high savings rate some 95% is held domestically, unlike the US, where more than 28% is owned by foreigners. You don't hear rumors of China threatening to dump its JGB holdings, because they own virtually none.

Ownership of U.S. Treasuries

Japan's notoriously anemic long term growth rate of a minuscule % hasn't exactly seduced managers to pack their portfolio with yen assets. Risk reducing hedge funds buying yen to unwind carry trades has been another dynamic at work. But it doesn't look so bad if you think that the US growth rate is about to double dip into negative numbers.

Yen bulls, and yes, there are such people out there, are hoping for a run to the 1996 high of ¥85, and even an overshoot to the all time high of ¥79.5. If that happens, you can kiss the Nikkei goodbye, and watch 10 year Japanese bond yield touch 0.45% once again.

This is one slugfest that I prefer to watch from the sidelines. I think the long term trend of the Japanese currency is down from here, and won't own it here on pain of death.

By. Mad Hedge Fund Trader




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  • Anonymous on July 15 2010 said:
    China is replacing US$ with yen in its reserve. China buy most its high tech from Japan and Korea because of US sanctions. I do not know whether the US realize it or not, its hurt itself much more by not selling high tech to China. And the reason for not selling high tech is outdated. The fear of Chinese military competition is unfounded :-)
  • Anonymous on November 05 2010 said:
    Japan is a very large exporter and runs large current account surpluses, it has large budget deficits but it borrows from it's own people through their savings and other assets, Japan also is a very large Creditor Holding assets around the World. The Yen is worth about 19 cent more then the US dollar when converted which most mainstream media do not anymore for Political reasons.Japan had an asset bubble and it burst but the Japanese are still very powerful Exporters and also own assets around the Globe, still a powerful country like Germany who also has these same strengths and perhaps stronger then Japan since the export even more.

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