JPY no longer so safe

This crisis has certainly changed quite a few things about the market. Actually, to put it bluntly, it has killed a few sacred cows.

The view that the JPY is super safe haven is, I'm afraid a notion that will lose credence going forward. I feel strongly that USDJPY will settle above 90 for the next 1-3 months.

The economic crisis has pushed exports-demand down the cliff for the export-dependent Japanese economy. The fundamentals of the economy won't be very supportive of the JPY - just by looking at the recent consensus release for Q4 GDP, the market expects a double digit contraction! This has not happened since the 1974 oil crisis.

The surge in JPY certainly hasn't helped exporters at all. Panasonic, Toyota, Sony and countless other exporters have announced huge job cuts and there isn't an end in sight.

We'll see how the market reacts when the final Q4 GDP figures are out next week.

Another thing that would put pressure on the JPY would be the deflation picture in Japan. The recent BOJ economic report indicated that core inflation would be negative for the next two years. This was corrobrated by the Jan wholesale inflation report which came in at -0.2%, the first since 2003. Remember the lost decade in the 90's? Asset prices are basically not going anywhere.

In any case, the above would mean the risk of deflation would last longer in Japan than in other developed economies and hence reinforcing the need for a really loose monetary policy for some time to come.

Till then, I fully expect JPY strength to adjust to the fundamental picture as it is already doing so now (The dow is crashing 200pts to 7747 but USDJPY is holding up well above 90 ?!)

I am going out on a limb here for a long horizon call (totally unorthodox for me)........ but this is building on my first post entitled 'First Salvo'.

My call for the next 1 month
Buy USDJPY from 89.40 - 90 (bottom of triangle formation in Jan)
Take profit at 93-94 (Jan 09 high)