(As written for My Paper on 26 July 2011. Click here to enlarge)
Japanese exporters are starting to feel the heat again.
With the Yen near its all-time highs, big names like Toyota, Sony and Nissan are frustrated that corporate profits are hurt due to the Yen strength.
As the world’s 4th largest exporter, Japan thrives on a weak Yen to aid export sales.
Early this week, the USD/JPY fell to 78.13, the lowest in 4 months.
According to the Bank of Japan’s Tankan Survey, that rate is now more than 4 Yen below the rate on which big manufacturers have based their earnings forecasts for the current fiscal year.
Japan Iron and Steel Federation Chairman Eiji Hayashida said last week that very few manufacturing companies can stay profitable with the Yen above 80 to the dollar.
A strong Yen hurts the bottom-line of a Japanese company when funds are repatriated back to the country.
As an example, when you buy a Toyota car in Singapore, you pay in Singapore dollars. The Singapore dollars is then converted to Japanese Yen when the funds are repatriated back to Japan.
If the Yen is strong, the repatriation process will produce lesser profits for the company.
Toyota has been a victim of a strong Yen for the past few years. In fact, it reported a loss of some 362 billion Yen last year, much of it due to the strength of the local currency.
“There is no change in the government’s stance that we are prepared to take decisive measures on currencies if needed to respond to disorderly moves,” Japanese Finance Minister Yoshihiko Noda said last week in a speech in the western city of Hiroshima.
The finance minister reiterated that he wanted to “carefully monitor the market.”
This is a clue that the Bank of Japan would carry out an intervention process by selling the Yen to prevent excessive gains in the currency.
The last time Japan intervened in the Forex Market was on 18th March this year, when it sold about 693 billion Yen. The G7 nations also took part in the exercise, jointly selling the Yen to stabilise disorderly movements in the exchange rates.
Not all traders agree that the Bank of Japan will intervene though. Some reason that the Yen strength is driven by factors beyond Japan’s control, such as Europe’s debt woes and the US debt ceiling debate.
In that respect, the Yen is appreciating during this period because of its nature as a safe haven currency.
Top News This Week
New Zealand Official Cash Rate. Thursday, 28 July 2011, 5am. I expect rates to remain at 2.50%.
Japan Prelim Industrial Production. Friday, 29 July 2011, 7.50am. I expect figures to come in at 4.7% (previous figure was 6.2%).
Buy USD/JPY at 78.80
On the hourly chart, USD/JPY is moving in a 60 pip range between the support level of 78.12 and Resistance of 78.72.
With talk from the authorities on the possibility of an intervention, the bias is to the upside.
We will go long when the price breaks through resistance. The entry is taken at 78.80, 8 pips above the resistance.
A protective stop is placed 40 pips below the entry price, and we will have one profit target on this trade with a risk/reward ratio of 1:1.
Entry Price = 78.80
Stop Loss = 78.40
Profit Target = 79.20