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Is the Bear Move in the Yen Coming to an End?
It looks like the Fed's debate about tapering has a long tail. Just mention the word 'taper' and it seems some asset class is going to contract. Last night it was the Japanese Nikkei 225 that sold off over 7%; this gave the equity bears some momentum. European markets were down 2 to 3%, and now US equities are trading lower by .40 to .93%.
Perplexing as it may seem, we are now in a convoluted world where good economic news is interpreted as bad news for some markets. Interrupt the flow of Bernanke's monthly $85B injection and there may be a hissing sound as some of the bubbles start to deflate.
In the US, it looks like some of this money has been going into the oil market. It has been baffling to me how record stocks of oil in storage, a slowing of global demand, and an increase in US production is bullish on oil. Perhaps we now know why.
The sell-off in the WTI was restrained compared to what happened in Japan. For the last six months the yen has been under pressure as PM Abe vows to conquer deflation with his version of QE. A lower yen means higher corporate profits and higher stocks.
, alert to bullish opportunity, jumped aboard the Nikkei futures. Higher prices meant the global funds became under weighted in Japanese equities. They bought and the party continued.
For forex traders, the yen has had a beautiful trend with few costly head fakes. The yen weakened from November when it was trading around 80 to a new low yesterday of 1.0372; it has since gone back up to 1.0172. If we stay around this level, it will mean the USDJPY (FXY) made a key reversal this week. The new USD high versus the yen followed a lower trade may bring some follow-through selling of the USD versus buying the yen.
Over the weekend,
Akira Amari was asked about the value of the yen on a talk show. He claimed he did not know but:
...it's being said that the correction of the strong yen is largely completed. If the yen keeps on weakening a lot more, it will have a negative impact on peoples' lives."
Later, other Japanese policy makers denied the yen weakening is over, but this does suggest there is a policy debate.
The weaker yen does bring some problems - namely, higher import costs hurt the consumer. While the car and electronic companies benefit, the consumer pays a higher price. Also, the energy imports have become especially dear and are a drag on the trade balance.
More important, though, is the higher cost of borrowing money. Rates in Japan are still low, but they are rising. In the last month, Japanese government bonds (JGB) 5-year yield has gone up 16bp to .37%, and the 10 year up 28bp to .85%. Should PM Abe achieve his goal of a 2% inflation rate in 2 years, what will the borrowing rate be then? Money is worth a premium above the level of inflation, and a larger premium if the market thinks inflation will continue to rise.
Remember, Japanese tax receipts only account for about 50% of the government spending. In addition, the government needs to service the existing sovereign debt which is over $14T and growing. This looming problem, not to mention the aging population, is what has made super bears on the yen.
Yes, the recent COT report show specs are loaded on the short side, 130.8K contracts. There may be some longs wanting to bank their profits, but sometimes what we see is what really exists.
This remains a bear market in the yen. We suggest trying to buy a retracement in the USDJPY should the pair trade around the 100 level. As always mind your money.
About the Author, Ralph Shell
: Traded personal account profitably for 19 of the 20 years at the CBOT. Ranked as one of the top five Forex opinion leaders on SeekingAlpha.com. Extensive career as a commodity broker and trader, formerly a commodity broker and grain analyst for Merrill Lynch in Chicago. Member of Chicago Board Of Trade for eighteen years. Floor broker for the Sparks Division of Refco for nine of those years. Also a former member of the Kansas City Board of Trade and the Minneapolis Grain Exchange. Floor trader for over twenty years, specializing in soy beans, wheat and the grains. Ten years as grain merchandiser for Continental Grain Company. Grain trading career included five years in the export grain markets as a wheat and then a soy bean trader. Also traded barge grain out of St Louis, and was the Assistant Manager of the South West Region of the US. First foreign exchange contracts in futures and options over 30 years ago well before the days of online retail fx trading. Today, Ralph is involved exclusively with analyzing and trading the forex market.
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