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In a recent Wall Street Journal article by Alex Frangos, ““Top Banks Missed Call Y100 Level Soon,” it was reported that not a single analyst from 15 financial institutions expected the Japanese Yen to fall to 100 per US Dollar. Across the board, investors in traditional safe haven assets such as gold and foreign currency were caught unprepared by the impact of Quantitative Easing III and other money creating efforts by the world's central bankers. Losses have been so heavy that some asset managers in the foreign currency sector are no longer in business.
It was not like this was not telegraphed well in advance by economic leaders around the world.
Federal Reserve Chairman Ben Bernanke introduced Quantitative Easing III, an open-ended program of buying $85 billon a month in Treasury bonds and mortgage-backed securities, to the world in September of 2012. Prime Minister Shinzo Abe of Japan ran for office last fall promising unprecedented stimulus efforts to bring the island nation’s economy out of the 23rd year of its “Lost Decade” of economic growth. The Bank of England has been very active in bond buying to breathe life into its economy.
Despite these public statements, Frangos reported that, “Who among Wall Street’s brightest currency minds predicted four months ago that the yen would get to 100 per dollar so soon? Nobody, that’s who. None of the currency analyst teams among the top 15 currency-trading banks surveyed by Dow Jones Newswires at the end of last year penciled in ¥100 to the dollar by the second quarter.”
There was clearly a plunge in the Japanese Yen (YCL) against the US Dollar (UUP) during that time segment. This resulted from two factors: the weakening of the Yen by the bond buying program of the Bank of Japan, and the flight to quality that, this time, sent funds into Greenback-dominated assets such as Treasury bonds.
That was a role reversal as the Japanese Yen was long considered a safe haven asset for investors when the US Dollar was tottering. As the chart below shows, the YCL rose after Quantitative Easing II was announced by Federal Reserve Chairman Ben Bernanke at the Jackson Hole meeting in August 2010. Over the same period, the UUP fell.
That failure to adjust to the new monetary paradigm and the reversal in the direction of the Yen was noted in a March 15 Reuters article by Tommy Wilkes and Sinead Cruise in that, “According to the Parker Global Currency Managers Index, the average currency-focused hedge fund fell 0.06 percent last month after gaining 1.42 percent in January - the biggest rise in 21 months - as the yen broke its fall against the dollar.”
From that, there was a reversal that resulted in the recent carnage that was unexpected by the foreign currency analyst community. This transpired despite many public announcements of a new monetary regime. As Quantitative Easing III and the economic stimulus measures of the Bank of Japan continue unabated, foreign currency experts should be better prepared for future market action that are announced well in advance by a nation’s economic leaders.