DOLLAR MAY BE ON VERGE OF TECHNICAL BREAKDOWN -- EUROPEAN CURRENCIES RISE WHILE JAPAN TUMBLES -- FALLING JAPANESE YEN GIVES A BIG BOOST TO JAPANESE STOCKS WHICH HAVE BECOME WORLD LEADERS
POWERSHARES DOLLAR ETF NEARS 52-WEEK LOW... Chart 1 shows the PowerShares US Dollar Index Bullish Fund (UUP) threatening to drop below its fourth quarter lows, which would put the UUP at the lowest level in more than a year. That would be a bearish turn for the dollar and would signal a possible drop all the way down to its 2011 low. The 50-day moving average fell below the 200-day line at the the start of October (red circle) and remains in that bearish alignment. Most of the dollar weakness is coming from European currencies. Most of its recent support has come from the British Pound, Canadian Dollar, and especially from the Japanese yen.
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Chart 1
EUROPEAN CURRENCIES RISE... Virtually all of the dollar weakness this year has come from European currencies. The most influential is the Euro which has the biggest weight in the UUP (57.6%). Chart 2 shows the Euro having reached the highest level in more than a year. Chart 3 shows the Swiss Franc also rising. The strongest Euro currency has been the Swedish Krona (Chart 4). Those two currencies carry the smallest weight in the UUP with a combined weight of 8%.
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Chart 2
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Chart 3
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Chart 4
FALLING POUND AND CANADIAN DOLLAR HAVE SUPPORTED DOLLAR... Two other currencies in the UUP have provided some support for the dollar. Chart 5 shows the British Pound falling sharply since the start of the year. It's now trading at the lowest level since August. Chart 6 shows the Canadian Dollar also weakening. Weakness in those two currencies has helped support the U.S. Dollar so far this. Most dollar support, however, has come from the Japanese yen.
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Chart 5
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Chart 6
JAPANESE YEN TUMBLES ... The most dramatic currency trend over the last five months has been the Japanese yen. Chart 7 shows the yen tumbling nearly 15% since its September peak and now trading at the lowest level (against the dollar) in nearly three years. The plunge in the yen is the result of aggressive quantitative easing in Japan to weaken the yen in an attempt to combat deflation which has plagued that economy for fifteen years. The falling yen also gives a big boost to exported-oriented Japanese stocks, and has given a big boost to the Japanese stock market. More than any other factor, the plunging yen (which is the second biggest currency in the UUP with a weighting of 13.6%) has kept the dollar from weakening further and sooner. The tumbling yen may also explain some the recent buying of the Euro. Chart 8 shows the Euro reaching a three-year high versus the Yen. The dollar, Euro, and Yen acount for roughly half of global currency trading. Money coming out of the yen has to go somewhere. It looks like most of it has been going into Europe.
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Chart 7
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Chart 8
JAPANESE STOCKS MAY FINALLY BE BOTTOMING... Japanese stocks have been worst performers over the last decade. That may finally be changing. The weekly bars in Chart 9 show the Nikkie Index trading over 11000 for the first time since 2010 and nearing a test of its 2010 high. The tumbling yen is a big reason why. Chart 9 shows a strong inverse correlation between the Nikkei and the yen over the last six years. The fourth quarter upturn in the Nikkei (up arrow) started as the yen tumbled (down arrow). The Nikkei also rose above a two-year resistance line (orange circle) at the same time the yen fell below a support line (green circle). Japan's export oriented economy has been held back by a strong yen over the past decade. A falling yen could reverse that negative trend.
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Chart 9
RISING YEN HAS CONTRIBUTED TO JAPANESE DEFLATION... The Japanese stock market has been falling since its 1990 peak. During that period, the Japanese yen has been the world's strongest currency. A rising yen during those twenty years has contributed to Japanese deflation. It appears that Japanese officials are getting more aggressive in an attempt to reverse that deflationary trend by weakening the yen in a big way. Chart 10 shows a generally inverse relationship between the Nikkie and the yen since 1990. That's been especially true since 2007 when a surging yen coincided with falling Japanese stocks. That trend is being reversed during 2013 thanks to the falling yen. Since the yen's September top, Japan has been the developed world's strongest stock market with a gain of 25%. That's twice as much as Europe's strongest market (Germany at 12%) and four times as much as the S&P 500 (6%). There's something else to think about. My latest intermarket book suggested that the deflationary trend over the last decade has helped keep interest rates unusually low. Most of the that global deflation came from Japan. If Japan succeeds in reflating its economy, that would most likely put upward pressure on global bond yields, including those in the U.S. It may not be too much of a stretch to suggest that the recent upside breakout in U.S. bond yields is tied to a rising Japan.
