The Winner in the Devaluation Race

At this stage, with its economy already stuck in a spiral of economic stagnation and deflation, Japan has the least to lose by printing yen and selling them against rival currencies. So although September dollar index futures (DXU3:NYBOT) are likely to continue imploding -- the euro greatly outweighs the yen on the dollar index -- look for BOJ forex market interventions to keep downward pressure on the yen.

Other Impacts

Over the past month, I've written about the percolating momentum in debt futures. There is an arbitrage trade for the Japanese government that works to support the rally in debt futures.

Here's how it works. The Bank of Japan prints fresh yen notes. With the currency, it buys U.S. Treasuries, yielding anywhere from 1.25% for short-dated Treasury bills to nearly 5% for T-bonds. If you've been wondering who might benefit by buying into the already extended move in debt, bear in mind that a 1.6% deflation rate plus say a 4.4% yield on T-bonds equates to a 6.0% real rate of return. And don't forget Japan will sell more Toyotas with each one-yen drop in the price of their currency while sparking domestic inflation.

Now that the world's two largest economies seem bent on devaluing their currencies and generating inflation, it's little wonder that investors are scrambling to find a secure store of value. A store of value and a safe haven during times of depreciating currencies have been traditional justifications for investing in gold. Hence, it's little wonder June gold (GCM3:COMEX) is running neck-and-neck with debt futures and the June Canadian dollar (CDM3:CME) as the strongest momentum markets.

SARS in China

These days in China, most patients now have to pay out of pocket to receive treatment at hospitals. No longer able to provide medical services for free, rural hospitals have asked patients displaying SARS-like symptoms to pay up front. Although the government has said it will pay for all patients diagnosed with SARS, the symptoms of SARS -- a fever and a cough -- are common in a variety of ailments. Many rural Chinese, unwilling or unable to pay to get a clear diagnosis, have steered clear of hospitals. While a mass outbreak of SARS in rural China hasn't yet occurred, poor medical facilities and training heightens the chance that the disease could spread in the countryside, a situation that still threatens the world's most populous nation.

November cotton (CTN3:NYBOT) took a massive hit in mid-April on fear SARS would cause the economy and demand for the fiber in China to contract. China is the world's largest importer of cotton. Cotton has retraced most of the decline since the March highs, but notice in the following chart how cotton held below multiple Fibonacci retracement levels and below its 20-day moving average. Over the past three days, cotton has also traced daily reversal bar formations that suggest it will resume its downhill track.