Will The Yen Bear Market Continue After The Election?

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Includes: FXA, FXY, JYN
by: Ralph Shell

On Sunday December 16, the Japanese will hold an election. The favorite, former PM Shinzo Abe, hopes to lead the Liberal Democratic Party to victory. Polls continue to project Abe to be the winner. Abe claims his policies will jolt the economy out of a 20-year slump that has produced five recessions in the last 15 years.

Abe's magic recovery formula is somewhat akin to Bernanke's $85B monthly monetary expansion announced this week. In Japan, the Bank of Japan (BOJ) will increase the money supply, which will hopefully cause inflation to rise to 2% per year and thus the deflationary spiral will end. So goes the theory, but there are many possible pitfalls.

The Japanese economy has been lagging for many reason: the over valued currency, the global economic slump, loss of competitiveness to China and other Asian countries, an aging population that consumes less than the younger group, and a dispute with China that is costing business.

An abundance of negative Japanese news has made the yen a very popular sale. The last COT report showed the speculative shorts in the CME yen futures was up to almost 141K contracts. The yen was been losing to all currencies. Against the USD it has weakened to over the 83.50 area. Our preferred long versus a short yen has been the Australian Dollar.

In our article posted on December 4, we noted:

" Against the long A$, we would try to sell the Japanese yen should there be some strength. There has been some minor yen weakness against the USD, as worries about the fiscal cliff come into play, but the AUDJPY has remained around 85.70.

Going back to the middle of November, the A$ had a quick 350 pip rally up to 86.40. With the pair clinging to the top Bollinger Band and the RSI topping 70, we were cautious, fearful that the overbought condition would give us a sharp sell off, and a chance to buy the break.

It has now been seven trading sessions, and there has been no break. Often, however, very strong markets do not give you a corrective break. Selling off toward the middle of the BB Bands may be the closest thing we get to a break."

Subsequently there were two consecutive days when the AUDJPY could have been purchased for 85.50. The pair has had a nice run, briefly checking out the 88.50 level. With the election posing a risk event, what do you do now?

The bear market in the yen in now widely advertised, and there are many short positions on. My inclination is to take profits today on at least half of the long AUDJPY (FXA, FXY) today. You can then tune in Sunday night to see if you were right or wrong.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.