Wednesday, 29 May 2013

Take What The Market Gives You

Ralph Shell, Excel Analyst

Take What the Market Gives You - Excel Markets ECN Forex Broker After a listless trade Monday, with the British and US markets on holiday, the forex markets came back to life yesterday.  Once again, the Japanese market set the tone.  PM Abe claimed there were additional tools at the disposal of the BOJ that can be used to kick the deflation habit; this was enough install some confidence in the Nikkei 225 which rallied 1.2%.

As we have discussed before, deflation is an economic death toll on an economy wallowing in debt.  Japanese debt is 230% of GDP, the result of two decades of deficit spending.  With deflation, this means you are then making debt payments with yen that cost more now than when the funds were borrowed.  The issuers of debt always hope to pay it off with a cheaper currency.  In this way, the debt is monetized.

The canary in the coal mine, however, is the Japanese Government Bond (JGB) market.  I have often questioned how the inflation rate can go to 2%, and the bond yields remain in single digits. 

Markets anticipate - or, as some claim, they discount - the future.  It looks like the JGB market is doing just that.  The yield on the 10-year bond is up 8 basis points to .90 today.  Of course when the yield goes up the price of the bonds go down.  Anyone owning JGBs will have an ever increasing mark to market loss as the rates climb. 

Perhaps there is some switching of bond money, moving it over the the Nikkei 225. 

Or perhaps there is JGB money headed over seas.  It might be a little dodgy, buying Spanish or Italian 10 year notes at 4.31 and 4.05% respectively, but what about Australia?  There, the 10-year is yielding 3.32%, and they have recently run a sale on the A$ (AUNZ, AUD).

As might be expected, the yen turned lower.  It did have a bit of a reversal last week, printing a new high and then selling off.  Note how the USDJPY sold off to the 20-day SMA (Simple Moving Average) three days in a row and then rallied today. 

Click to Enlarge USDJPY Daily Forex Chart

Years ago, when I was a floor trader in Chicago, I would sometimes think I was smarter than the market.  This rarely worked well,  Then I put a sign on my desk which I read religiously before going to the floor. 

It said: "It is easier to ride a horse in the direction it is going."

As long as the yield on the JGB keep going up the yen is going lower.  You go with the trend and take what the market gives you.  Finally, you do not get margined to the max.  Excessive leverage means your entry level must be perfect, or any random market noise will chase you out. 
Facebook Excel Markets Tweet Excel Markets Reddit Excel Markets Digg Excel Markets

1 comment: