The Yen Defies Fundamentals
April 5, 2016
Dennis Gartman is editor and publisher of The Gartman Letter, and strategic advisor of the AdvisorShares Gartman Currency Hedged Gold ETFs (GEUR & GYEN). He regularly contributes to AlphaBaskets and lends his institutional insight to educate advisors and investors about commodities and the forex markets, including about trading gold in different currency terms.
The Yen is stronger as unwinding of Eur/Yen crosses is taking precedence this morning, perhaps as a result of these conversations and perhaps in response to unwinding of carry trades…a process that began several months ago as the global equity markets began to make their way lower. At this point we find the Yen’s strength wholly ill-advised from an economic perspective because we can only surmise that the proverbial Mr. and Mrs. Watanabe, faced with negative interest rates on their deposits in Japan, have to turn to investments abroad to get any sort of positive returns. This should in the end inure to the benefits of “dollars” generally, but for the moment clearly that is not the case.
We do fear that the long term support for the Yen vs. the US dollar that has been so evident at 111.00 since early February may be in jeopardy. It was put to test and held in early February; it was put to test and held again in late February; it was put to test…and actually broke for a few hours… in mid-March and it is being put to test again today as we write. The Watanabe’s should be the support for the dollar there, but what if they too disappear? Shall the consolidation between 111-115 then become a mid-point consolidation arguing for a massive break to the dollar’s downside? Certainly that does not seem reasonable or even logical, and economically that seems quite impossible, but technically it is becoming a distinct possibility… and one we’d really rather not think
about, for it is too fearsome at the moment.
We are of course dismayed to see gold as weak as it is, for although gold in dollar terms is higher for the year and is much stronger than has been investment in equities, the market does appear to be under duress. We cannot avoid saying so; to say otherwise would be untruthful and wrong. We had hoped that the recent action between $1200-$1275 would eventually be a mid-point consolidation but it is looking more and more like a top formation instead.
Of some hope otherwise is the fact that the volume trend on the COMEX is downward over the course of the past full month; that is, volume is falling as the market falls and as believers that volume follows the trend, we take this as a hopeful sign. But clearly we are on the defensive at the moment, hoping that the support on Friday at $1210-$1212 shall hold today but worried that it won’t. Saying otherwise would be illogical and wholly wrong.