Wednesday, 1 May 2013

Is It Time For The USD To Lose To The Yen?

Ralph Shell, Excel Analyst

Selling the yen has been a big winner this year. 

Forex Razor Industry Review Contest, May 2013Actually, the move commenced in October when traders began to recognize the new Prime Minister might be Abe, a proponent of aggressive monetary expansion.  For years the Japanese had been trapped in a deflationary spiral and no economic growth.  Abe's cure for the moribund economy was straight from the Keynes text book.  Having the Bank of Japan to increase their balance sheet, buying Japanese Government bonds, thereby increasing the money supply would be the answer.

Against the USD, the move commenced around October 1st when the pair was trading under 78.  In the seven months that followed, the USD moved up to the cusp of the 100 handle.  Failure of the market to conquer the 100 handle has caused a sell off toward the 97 level. 

Does this mean the bear move in the yen is over?

No doubt part of the yen strength versus the USD has been the mixed results of the US economic data.  Today - Wednesday - was no exception.  The ADP Employment Change report fell short of expectations.  This report is an attempt to anticipate the NFP number but their results are not very prescient.  They did cite tax increases in the US, payroll and the tax the wealthy more taxes, combined with some spending cuts, have all served to slow the hiring.  But like most of the recent US reports, recent first time unemployment numbers provide a conflicting story.  This report will be out tomorrow.

The ISM Manufacturing PMI did come in a touch better than expected, 50.7 rather than 50.5, but still down from last month's 51.3.  Later today we get the report from the Fed Open Market Committee.  Most observers think the Fed's policies will remain unchanged.

What is happening in the US, however, is of much lesser importance than the changes proposed by the new BOJ Governor Kuroda.  He has indicated he will loosen the money supply, buying an assortment of Japanese maturities, and may buy foreign bonds: buying the foreign bonds might then involve the selling of yen. 

Such proposals have caused the yen traders to switch positions.  Once again the yen  has become a favored funding currency.  Selling the yen and buying ten year Australian paper which pays over 3% is one trade.  The BOJ has said they are going to keep rates near zero and print lots of yen so why not do this carry trade.

The yen had also been a favored place to park money by the safe haven seekers.  A depreciating  currency is not a place for safe haven seekers to park their money.  Offsetting the haven money fleeing has been offshore funds coming home, and buying Japanese equities with the depreciated currency.

Speculators have actively sold the yen.  Our most recent COT report show the specs are short 118K contracts.  Speculators have had a lot of encouragement to sell the yen.  One prominent analyst has said the Japanese economy has been like a bug looking for a wind-shield.  George Soros is reported to have made another billion from a short yen position.  Another respected adviser with many listeners has said the USDJPY (FXY) yen may go to 120 or even 150.  Further, he suggested buying the AUD and the NZD versus the yen, as well as selling the yen to buy gold.  No surprise then, the spec is a big yen short.

There is no doubt there is risk with this graduate Keynesian adventure.  Already the debt to GDP ratio is approaching 2.4-to-1.  New funding is needed each year to fund the big deficit.  With an aging population who had been frugal during their working years, there is ample savings to buy the JGB's, but will this continue?

According to a recent article suggests fund will be flowing out of Japan.

"The nation's four major life insurance companies are set to shift away from investing in government bonds, whose interest rates are expected to fall, to foreign bonds that are expected to produce higher yields.

The life insurers - Nippon Life Insurance, Dai-ichi Life Insurance, Meiji Yasuda Life Insurance and Sumitomo Life Insurance - announced their investment policies for fiscal 2013 last week.

They apparently believe that rates on government bonds will likely decline because of the Bank of Japan's policy of drastic quantitative and qualitative monetary easing."

There is another problem that will arise should the 2% inflation rate be achieved.  What will the the JGB's yield then?  Currently the ten year yields .60%.  To achieve this real rate of return bond investors would need at least 2.6%.  How do you know the inflation will stop at 2%?  How big will the deficit then be?

Click to Enlarge USDJPY Monthly Forex Chart

The problem I have with taking a new long USDJPY at this time is the bear stories are in the market.  This is why we are here.  Sure, the USD was worth as much as 120 in 2007, and we may go back there again.  But the monthly chart shows seven straight months of bullish candles.  Eight candles going in the same direct in any but the shorter time frames is quite rare.  Despite the well advertized bear yen story, I am  wary.

Click to Enlarge USDJPY Daily Forex Chart

The daily chart might provide guidance for the bulls.  Unable to conquer the 100 handle, the bulls are taking a break.  We wonder though if the trend line which come into play at about 96 might not be an entry if you have dreams of running through the 100 resistance to a 105 target.  A 96.50 entry with a 100 pip stop and a chance to break above the 100 resistance is attractive risk reward.  As always, mind your money.
Facebook Excel Markets Tweet Excel Markets Reddit Excel Markets Digg Excel Markets

1 comment: