Why the Pressure is on for the YEN to Strengthen
The break-down of the YEN weakening relative to the US stock market may seem incidental to many. But strong correlations of a foreign currency to an exponential rise in the S&P500 since the first of 2013, after already significant gains from the lows of 2009, is a sign that something is changing. In other words, it is time to pay attention. Unfortunately, when things begin to change after large advances in asset prices, it usually means there is a busted trade and the risk of cascading losses start to build up in the markets. I raise this concern because since the first of this year investors have witnessed a growing number of market unwinds – gold, emerging markets, U.S. Treasury markets and the Nikkei. And now we see a changing dynamic in the YEN relative to the dollar, at a time when many are expecting further YEN weakening.
To assess the risk and understand why this is happening, I decided to do an in-depth review of the capital flows into and out of Japan that would influence the price of the JPY relative to the USD.
The following series of charts examine the investment capital flows from sales and purchases of investments by various groups that would influence the relative strength or weakness of the YEN over the last year (YEN has been converted to USD based on the prevailing average monthly exchange rate in all data obtained from the Japan Ministry of Finance).