Sunday, 7 September 2014

Japanese Yen Falls to Lowest Since 2008, Euro Lowest Since 2013

Ralph Shell, Excel Analyst

It was a banner week for the USD bulls as they pushed the euro (EURUSD, FXE, UUD, UDN) to the lowest level versus the USD since July 2013, and the lowest in the yen versus the USD since September 2008.  It was euro and yen weakness that widened the spreads.  Since the market was loaded with spec shorts, it has been a good week for those correctly positioned.

Going forward, this means we are headed for trading sessions with increasing volatility.  From personal experience, I know when traders have more equity in their accounts, they trade more.

The euro and the yen were both helped lower by government action to expand their respective money supplies.  For the EU, this belated growth in the money supply is one of the factors which is sending the EU back toward another recession, but the ECB President Draghi's policies cannot be blamed.   The US, UK and Japan were are all actively increasing the money supplies but this policy was opposed by Germany.

As we have mentioned before, the German word schuld has two meanings, debt and guilt.  This might explain the German reluctance to take on new debt.  Now the entire EU is paying the price with slow or no growth and record high unemployment.

Click to Enlarge EURUSD Daily Currency Chart

Jeremy Warner summarized his view of the euro in The Telegraph:
Since the advent of monetary union, a once confident and optimistic continent has fallen into a state of seething unrest, political turmoil and economic misery. The euro will probably stagger on in some shape or form. Broken it may be, but fear of what comes after acts as a powerful guarantor of survival. Can it ever expect to justify the price being paid? The judgement of history is unlikely to be kind.
Since trading threw the 200 week SMA at 1.3435 in late July the market has accelerated to the down side in a free fall.  Currently the trade is around 1.2950.  The 14-day RSI is down to 17.6 and the 14 week RSI is 23.  These indicators show the market to be deeply oversold.  Though not guaranteed, a rally seems likely, so it is best to take some of the money out of the market.

Click to Enlarge EURUSD Weekly Currency Chart

Part of the weakness in the yen may have come from heavy buying in the USD versus sales of the yen.  Thursday last, the futures trade in the euro was 483K contracts, and the OI went up 14,312 contracts.  There was also an increase in the euro Option OI  by 20,262 contracts.  Since the spec trade is already short, the addition to the OI tells us they are extending the short.  The government is also taking action which the market believes will weaken the yen.

As a response to the disappointing Japanese economic numbers, still reeling from the increase in April of the consumption tax to 8%, the BoJ will continue to increase the money supply.  Japanese President Abe has also made changes in his cabinet, the most significant may be the appointment of Yasuhisa Shiozaki to be the New Health Minister.

Shiozaki has degrees from the University of Tokyo and the Harvard Kennedy School of Government and was employed at the Bank of Japan.  This background makes him well qualified for the job.  Bloomberg reports:
Shiozaki, 63, was put in charge of duties including overseeing the $1.2 trillion Government Pension Investment Fund, replacing Norihisa Tamura in a cabinet reshuffle announced today (Friday, 05 September 2014). Shiozaki, who previously served as deputy policy chief for Abe’s Liberal Democratic Party, has been one of the biggest proponents of reducing GPIF’s reliance on domestic bonds and making the fund more independent of bureaucrats...

Investors believe Shiozaki will spearhead reforms because he is a leading figure for GPIF changes and vocal about corporate governance,” said Hiromichi Tamura, Japan chief strategist at Nomura Holdings Inc., the nation's biggest brokerage. “This will cement the market view that GPIF will cut its local bond target to 40 percent and boost Japanese shares to 20 percent in its new portfolio."
It is rumored that shifting GPIF funds from bonds to equities may include the purchases of individual stocks, one of the reasons the Nikkei stock average has been strong.

The shift from Japanese government bonds to stocks or higher-yielding bonds by the GPIF will no doubt be copied by other Japanese fund managers.  Some of these funds will  involve selling the yen to buy foreign stocks or bonds.  Timing for this activity seems to be 4Q of 2014.  This is a major reason the short position held by the specs, in the yen has recently soared.  The COT report released this afternoon show the specs are now short 169,914 yen contracts, up from 154,542 last week.

Click to Enlarge USDJPY Daily Currency Chart

Unlike the euro, the yen is not in the deeply-oversold area as measured by the RSI.  After racing to the multi-year low during the confusion after the US reports, the yen has strengthened marginally.  The popular case for the USDJPY to trade in the 108/110 area prior to year-end has been made, however, and we may need to see increased evidence of capital flow from Japan.

The spec position in both the euro and the yen is immense and with good reason, but how much of the bear story is already priced into the market?

As mentioned, part of the pressure on those two currencies is because of strength in the USD.  Until today most of the data confirmed a gradual US recovery which might hasten the day when US rates increase.  The NFP report Friday may have dispelled some of the USD bullishness.  The BLS (Bureau of Labor Statistics) said the NFP gain for August was only 142K, far less than the 190K anticipated and most of the jobs were not high paying.  And again the labor participation rate dropped a tick to 62.8%.  The total working age population not in the labor force increased to a record 92,269,000.

By the close of the equities markets in the US, the markets shrugged off the NFP report and closed higher.  There is an abundance of cash around, thanks to the Fed.  The big plays in the forex markets have ample participants.  I remain bearish and prefer to wait to see if there is not a better selling opportunity.

Click to Enlarge EURJPY Weekly Currency Chart
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