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James Hyerczyk

The Dollar/Yen finished the holiday-shortened week lower as investors continued to pressure the greenback in anticipation of an even further decline in 2021. The catalyst behind the selling is tied to the huge bet that the global economic recovery will pull money into riskier assets even as the U.S. has to borrow even more to fund its swelling twin deficits.

Last week, the USD/JPY settled at 103.305, down -0.195 or -0.19%.

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Deterioration in ‘Twin Deficits’ Should Favor Japanese Yen

According to Reuters, “The prospect of a brighter 2021 has lessened the need for a safe-haven dollar, while burnishing the attraction of riskier assets especially in emerging markets.”

“Bears have also resurrected the “twin deficits” excuse for shorting the dollar- that the explosion in the budget and trade deficits means more dollars being printed and moved abroad.”

“From this perspective the new U.S. stimulus bill is dollar negative as it adds to the nation’s debt, and President-elect Joe Biden is promising a lot more next year.”

“The country is also hemorrhaging dollars on its trade account where the deficit on goods hit a record $84.8 billion in November as imports surged past pre-pandemic levels.”

“Likewise, the current account deficit widened to a 12-year high in the third quarter and there was a large shortfall in net financial transactions as Americans borrowed more from abroad.”


Bloomberg:  Wall Street’s Call for Yen at 100 Catches On at Japan Banks

Earlier in the month, Bloomberg wrote, “Wall Street and Japan’s largest banks are starting to see eye to eye on the yen’s outlook, saying its advance could break the barrier of 100 per dollar this year.”

“JPMorgan Chase & Co., Goldman Sachs Group Inc and BNP Paribas SA are all forecasting that Japan’s currency will hit the century mark for the first time in four years in 2021. Rarer still, domestic giants Mizuho Bank Ltd. and MUFG Bank Ltd. are joining them, with estimates that the yen could even push to 98, a level unseen since 2013.”

“The perception gap has been in place for years,” said Hiroshi Yokotani, portfolio strategist for fixed income and currencies at State Street Global Advisors in Tokyo. “Compared to past years, more Japanese seem to forecast the dollar weakness and yen appreciation to progress a bit further next year.”

Weekly Forecast

Although there are key economic releases from the United States this week, the focus will be primarily on the two January 5 Georgia runoff races that will determine whether Democrats or Republicans control the U.S. Senate this year.

A Republican victory would mean they would hold a 52 seat Senate majority that would allow them to block some of President-elect Joe Biden’s agenda.

A Democrat Party win would give it 50 seats and the tie-breaking vote from Vice-President-elect Harris. This would give the Democrats control of the Senate after six-years of a GOP majority. This would likely mean that Biden would be able to pass most of his proposals that would include more stimulus.

Most traders agree that Democratic victory would likely widen the “twin deficits”, putting huge pressure on the U.S. Dollar.

For a look at all of today’s economic events, check out our economic calendar.
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