A Forex View From Afar

The global slowdown and the yen link

The equity markets have taken a beating recently and the major stock market indexes are tumbling. The MSCI Pacific Asia index is off by 25% this year, of which 6% came in the last week alone, while the S&P has fallen 16% year to date.

Analysts and economists are starting to think the credit squeeze and the global slowdown will have a deeper effect on the real economy than previously expected. When the sub-prime crisis came to light, the fist estimates were that growth will pick up in the third quarter in the U.S., while the rest of the world would be unaffected (the de-coupling theory). Now, ahead of the third quarter, all the major developed economies have been affected, and some may even face a recession in the coming quarters. The U.S. situation is not too rosy either, since exports – what actually saved the economy from the brink of recession up until now – are going to fall with the global slowdown. Furthermore, some are even starting to suggest the slowdown will continue beyond 2009, as inflation will erode the economic growth.

Against such a background, the yen (Usd/Jpy) does not stand too many chances of going too far to the upside. Adding the political problems in Japan, the yen can only face hard times ahead as investors will take a wait and see approach until things normalize.

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