Ashraf Laidi submits:

Much has been said about the US dollar’s role as a funding currency for carry trades and its well publicized rebound during the most recent episode of risk aversion (Oct 21-Nov 2). But once again, it was the Japanese yen that outperformed the US dollar as well as all major currencies. This helps explains why the emerging gains in non-USD currencies (EUR, GBP, AUD, CAD etc) remain limited against the JPY when equity markets are on the rise and are quick to lose ground vs. JPY than against USD. Both USD and JPY pay ultra low interest rates, with 3-month LIBOR at 0.27% and 0.32% respectively. But the medium term future prospects remain brighter for JPY relative to USD.

While the Federal Reserve is seen injecting emergency liquidity well into Q1, the Bank of Japan will conclude its program of purchasing of corporate debt by year-end. And with continued record bond issuance from the US treasury seen further lifting the US financial deficit to above 11% of GDP (vs. 8% for Japan), the secular case against USD shows no signs of abating. Meanwhile, as commodities respond positively to favourable dynamics for the global economy, the US dollar should once again underperform the yen.

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