Thursday, 8 August 2013

Yen Bears Taking the Summer Off

Ralph Shell, Excel Analyst

Excel Markets Analysis From November until May the yen bears, versus the USD, had a party, taking the yen's worth down from about 78 to well above 103 to the USD.  Looking at the monthly charts, there was a higher close on the USD compared to the yen for eight consecutive months. 

Now, for the third straight month, the yen is regaining lost ground, and the yen bears are getting punished for overstaying their position.

The currency move might be exaggerated because of reduced summer trade in the currency.  Trade is down at the Tokyo Stock Exchange by about 30%.  Likewise, the daily dollar-yen trading is down to about $10B in the last month, also a 30% reduction.

Trade at the CME futures has also slowed.  Total OI was up over 298K contracts in late May.  In the last COT report, the total OI of futures and delta-adjusted options was down to 213K.  The same report from May 28th showed specs with short positions over 136K.  The short position remains high, but was down to 110K in the last report.

As we have often said, the most important fundamental in currency trading is the flow of money.  When specs are busy selling the yen, and the volume of trade is up and the price keeps going down, this gives us a bear market.  Then, when they take their money off the table, so to speak, and liquidate their shorts, the market turns around.  We appear to be in that stage currently.

This is not to say that PM Abe has solved the myriad of problems confronting the Japanese economy.  The population is aging, the deficits are too big, tax receipts are too low, excessive regulations hamper the Japanese economy, and the debt level is excessive. 

According to News on Japan.com:

"The International Monetary Fund said Japan's economy is recovering from years of stagnation, but that far-reaching reforms and a "credible plan" are needed to reduce its debt mountain and sustain growth in the long run. ....the report emphasized the need for 'significant adjustments' to help reduce Japan's public debt, which will amount to nearly 250 percent of gross domestic product this year. "

Will Abe's government be able to make the tough choices needed to reform the economy or will he bow to the many vested interests who benefit from the status quo?  An early test for the new government's resolve might be the approach to the new consumption tax.  Aware of the revenue shortfall, the Japanese politicians passed a law for a consumption tax increase that would not commence until April of 2014.  At that time, the 5% tax would go to 8%; and, finally, to 10% in 2015.

Consumption taxes are never popular, and an 8% and then a 10% tax are need to reduce debt, now estimated to be aver 230% of GDP.  But a tax increase after a mini business recovery will squelch that recovery.  How this dilemma is resolved will give us a clue as to how successful Abe's reforms might be. 

Higher taxes will hurt the Japanese economy but failure to narrow the budget is a poor alternative.  In the longer timeframe, neither is bullish for the yen.

Click to Enlarge USDJPY Daily Forex Chart
USDJPY Daily 07 August 2013, Excel Markets ECN Forex Broker

But, in the short term, as the yen shorts cover, the trend is for the yen to gain on the USD.  Currently, the USD sell-off to the yen may be a little excessive, but so was the move from 80 to 103.  Given a chance, we would be a seller in the 97.50 area.  We think the yen can appreciate to the 94 area.  Longer term, it is still a bear deal, but not now.  As always manage your money.

Click to Enlarge USDJPY Weekly Forex Chart
USDJPY Weekly 07 August 2013, Excel Markets ECN Forex Broker
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