Societe Generale’s Albert Edwards says investors should be paying more attention to the yen/dollar chart. To the right, you’ll his chart, which goes back to 1986.
In a note to clients Thursday, Edwards forecasts that the yen will plunge to ¥145 per dollar by the end of March. He sees ¥120 as the key resistance level that may be crossed soon, plunging the yen to levels last seen in 2002:
“The yen is set to follow the US dollar DXY trade-weighted index by crashing through multi-decade resistance – around ¥120. It seems entirely plausible to me that once we break ¥120, we could see a very quick ¥25 move to ¥145, forcing commensurate devaluations across the whole Asian region and sending a tidal wave of deflation westwards.”
Edwards writes that the “tidal wave of deflation” will first hit China, which has already seen a streak of falling producer prices.
“After a record 32 successive months of deflation at the producer price level, China has suffered as much PPI deflation over the past three years as it did in the immediate aftermath of the 1997 Asian crisis. Do investors really think China can cope with a devaluation of the yen from here? They simply cant tolerate this and they wont. They will devalue.”
On Tuesday, the yen tumbled to a seven-year low against the dollar, trading near ¥115.7. It traded near this level on Thursday.
The yen fell sharply late October after the Bank of Japan surprised financial markets by announcing an additional round of stimulus measures that will see its balance sheet expanding by 80 trillion yen a year. And a report earlier this week that Japanese prime minister Shinzō Abe is planning to call for a snap election pushed the currency to a seven-year low. The vote could shore up political support for Abe while also signaling to investors that dovish economic policy will continue.
In September, Edwards wrote that he saw the yen threatening to cross ¥120, and then depreciating so much that it throws Western economies into a recession. Even though that hasn’t happened yet, here’s why Edwards says Japan will lose what he calls “this phase of currency wars:”
simply think Japan will lose control of the situation given the quantity of QE being spewed into
the markets and unless the US, the eurozone, or indeed Korea, is prepared to come remotely close to Japans rate of QE, jawboning currency stability will do very little.”