Schork Oil Outlook: Dollar-Yen Trade Means Armageddon?

While the dollar-euro futures have been trading sideways for the past few weeks, a sea change is occurring in the dollar-yen trade. As of yesterday, one dollar was worth just 83.77 ¥, its lowest point in over a year.

If the general downtrend was not troubling enough, the Japanese government intervened yesterday for the first time in six years to depress the yen and encourage exports from the country.

This may be good news for Japan’s exports, but it is bad news for everyone else.

Fundamentally, it makes the cost of raw materials higher for the American manufacturing industry which, as demonstrated by the latest nonfarm payrolls data, is helping keep the recovery afloat.

One may assume that crude oil is now cheaper for Japan, thus boosting demand. This works in theory, but not in practice.

Due to a demand for energy security, Japan imports its crude oil from neighboring countries, and none from the USA. Of the 8.52 MMbbls/d of gasoline exported, only 3 Mbbls goes to Japan, or just under 0.04%.

The disparity is even greater when we examine the big picture. According to the Department of State, The United States exported roughly $51.2 billion worth of goods to Japan in 2009. In comparison, U.S. imports from Japan totaled $195.9 billion over the same period. As of 2004 (the latest data available) the U.S. accounts for 22.7% of Japanese exports but only 14% of its imports. The bottom line is clear.

Before the recession hit full force (circa summer 2007) we heard rumblings on the grapevine that a dollar worth less than 100 ¥ would spell Armageddon. At the time it seemed like one of many crackpot theories, but in hindsight it was strangely prescient. The dollar fell below 100 ¥ in October 2008. Analysts at The Schork Reportalert that there is little doubt that such weakness, and currency manipulation, hurts the domestic recovery, even without retracing to these levels.


Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.