Yen Reaches 13-Year High Against the Dollar

The massive short yen/long dollar carry trade is beginning to unwind in earnest. The dollar is a dead duck. Inflation is straight ahead. This is not the time to be long T-bills or T-bonds.

The yen is up 25% against the dollar this year, so far.

And here's a bit of sanity in a world of micro manipulating governmemt financial offiicials. Shoichi Nakagawa, Japanese finance minister, said he is not considering intervention in currency markets for now, the Nikkei newspaper reported on its website. Nakagawa also said the latest moves in currencies were not too sharp and that the yen’s recent gains were not bad.

First Sign That the Panic Phase May Be Close to Over

We have been closely monitoring M1 nsa three month annualized growth as an indicator of when the panic phase in the markets may end. Once M1 growth slows, it will be a pretty good indicator that this phase may be over., since it indicates that new panic money isn't flowing into cash and demand deposits.

Another indicator to watch is, of course T-bill and T-bond rates. The dramatic drop in these rates is also a measure of panic in the markets. There is no other way to explain 0% T-bill rates. Once these rates start to climb, it will be another sign of reduction in panic.

A third factor is the dollar, in a flight to quality (though in our opinion you have to be mad to think the dollar is a quality source of protection, when the Fed is pumping money at double digit rates). The dollar has been climbing as the global markets collapsed. That is until the last couple of weeks.

The dollar has stopped climbing and now is down nearly 5% since its most recent high.

The best indicators are M1 and Treasury rates, but the renewed dollar decline is certainly a good secondary indicator that we are close to the end of the panic.

FT's John Authers has a solid video presentation of dollar movement over the last 9 months. It is worth watching. Our only disagreement with the video comes near the end where he suggests the problems in Detroit may be responsible for the dollar decline. Not a chance. Foreign exchange markets are much too diversified over numerous industries to be impacted by concerns about Detroit. Note also the strength in the yen against the dollar, this is likely unwinding of the short yen/long dollar carry trade positions.

G7 Disses Climb In Yen

Below is a statement issued by the G7 Finance Ministers and Central Bank Governors:

We reaffirm our shared interest in a strong and stable international financial system. We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability. We continue to monitor markets closely, and cooperate as appropriate.

The strength in the yen is likely the result of two factors 1. the unwinding of carry-trade positions by some hedge funds and 2. it could very well be a sign of major new diversification away from the dollar. The dollar has been strong of late, as mis-guided investors consider a move into the dollar a flight to quality, but as Warren Buffet warns:

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

When the deprecation becomes obvious the yen strength is likely to only intensify.

Any attempts by the G7 to slow the yen's ascent will be short-term in impact. Indeed, the trade to be made is to go long the yen on any moves by the G7 to push it down.