Barclays Fx Trading Platform - Yen to Replace US Dollar As Weakest Currency in 2010

Only days after the US dollar was officially declared, 'overvalued' by the IMF at the G-20 meetings in Scotland, the credit default markets are saying there may be an even more overvalued currency, the Japanese Yen. Barclays Fx Trading Platform

'The yen is poised for its worst tumble since 2005," writes Bloomberg News, "as doubts about Japan's fiscal footing double the cost of insuring its debt." The price of hedging against losses on $10 million of the country's bonds with credit-default swaps has doubled since August, from $37,000 a year to $76,160 a year in November.

The rise in Japan's debt protection costs is in direct contrast with that of U.S credit default swaps, where prices have fallen to the lowest level in a year despite record debt issuance. The spread between US and Japanese credit default prices reached the widest in November after Japan's debt grew to almost twice the size of the economy.

The rapid increase in credit-default swap premiums suggest the market may be expecting a credit downgrade from the rating agencies. Standard & Poors, Moodys and Fitch have been mostly silent on the subject. This is not surprising, as the corpse is often cold before the rating agencies' respond. However, there is no shortage of currency analysts willing to share their opinions on the yen's bleak future with Bloomberg News:

Yen bears speak out

"We can't rule out the possibility of capital flight away from Japan due to its deteriorating fiscal position," said Yuji Saito to Bloomberg News. Saito is head of the foreign-exchange group in Tokyo at Societe Generale SA.

"The Japanese fiscal situation is horrific," said Richard Benson to Bloomberg News, Benson helps oversee $11 billion of currency funds at Millennium Global Asset Management in London.

The yen's value "is not consistent with the underlying fundamentals, and that's a huge opportunity," said Michael Hasenstab to Bloomberg News, Hansenstab, who oversees $45 billion in fixed-income assets for Franklin Templeton Investments, also remarked, "The yen is very vulnerable."

Yen's spectacular two year performance

Unlike the free-falling US dollar, the yen has been a high-flying currency in recent years. The yen has gained 24 percent over the last two years. This makes it the best performing out of 171 currencies tracked by Bloomberg. Barclays Fx Trading Platform

Growing consensus on yen's demise

But now, according to many experts, the hot streak is over. In a recent Bloomberg survey, 34 out of 38 strategist saw the yen falling by June of 2010. Landesbank Baden-Wuerttemberg, the most accurate of the 46 Bloomberg-surveyed forecasters, predicts a 9.9 percent decline to 100 from 90.09 at the end of October. Goldman Sachs Group forecasts 105 in 12 months, a 14.8 percent slide from the Nov. 13 close.

Even more compelling, the red-hot currency strategists at Barclay's Capital, put out a note to carry-trading clients recommending they move from a diversified funding currency position (USD, EUR, JYP, CHF); to a totally short JYP position.

This aggressive forecast is based on Barclay's belief that the JYP could be the worst performing currency over the next 12-month period. In addition to the new Japanese government's planned record spending and borrowing even with tax revenue falling, Barclay's expects the yen to weaken against the dollar due to japan's deflationary scenario requiring rates to be kept low for an extended period of time.

Impact on Carry-Trade Strategy

It was acknowledged by the IMF and is widely known to carry traders that the USD has become the favored funding currency for the carry trade. While both the USD and JYP feature near zero level interest rates, the dollar has been decline in recent years while the yen has been appreciating. This is a compelling scenario for a value trader-buying back a weak dollar short and selling into a rising yen.

Conversely, it is a nightmare for a trend trader-abandoning a seven-year weak USD trend to sell into an anticipated new, down trend in the JYP. To resolve this dilemma, we turned to our trusty neural-network trading systems. Meta Trader 4 Systems for MT4 users, and Forecasttrader.com for non MT4 traders