Is Japanese Wealth Heading To Australia?

Includes: FXA, FXE, FXY, UDN, UUP
by: Ralph Shell

By now the Japanese savers have been fairly warned - their savings, the portion not invested in Japanese stocks, had best be parked elsewhere. The Japanese have trillions of dollars of savings, so where is the accumulated wealth to be allocated while PM Abe and friends flood the markets with newly printed yen?

Conventional investment banker wisdom touts local equities and commodities. The run up in the Nikkei 225 to the top side of 13,500 from under 8600 in mid November has been good advice. Gold and other commodities are weak, but really, commodities and equities are hardly suitable for the aging Japanese savers.

Some Japanese yield seeking investors are rumored to be buying bonds in the developing world, including Korea, Thailand and Mexico. Australian debt has also been attracting some foreign demand, partially responsible for taking the yield on the 10-year Aussie bond down over 30 basis points to 3.31%, but still a big premium to the US ten year at 1.75%.

We wonder if some of these Japanese savings are making their way to Australia. After trading early this week, down to 1.0350 the Aussie (AUDUSD FXA) enjoyed a strong rally to 1.0580 before a little sell off today. Trading the Australian dollar at the CME has also become quite popular as the total open interest is up to almost 200K contracts. With the open interest in the yen only 215K, this illustrates the degree of interest in the Aussie Dollar.

The Australian dollar may be primed for some volatility in the coming week. Yesterday the Australian employment numbers were poor. There was a loss of 36.1K jobs, the participation rate dropped to 65.1, and the unemployment rate dropped to 5.6% from 5.4. Early Monday China will announce quarterly and yearly GDP rate which is expected to be 2 and 8%. Numbers stronger than these would likely give the Australian dollar a boost.

We also have the RBA policy minutes on Tuesday. While we are concerned about being a late arrival to the Aussie's bull party, we are inclined to be long the Australian dollar, hopeful it can take out resistance at the 1.06 handle. If that level is conquered, the target should then be around 1.0850.

The US economic news continues to fall short of expectations. While the first time claims for unemployment yesterday at 346K was a good number, these numbers are often adjusted later. Today US retail sales fell well short of expectations, as did the US M/M PPI number down 0.6%. The consumer confidence reported by the University of Michigan plummeted from 78.6 to 72.3. This was a nine month low and the biggest drop under the expected number in years. These reports give the Fed little reason to slow their QE, and this may be weighing on the USD.

From our COT studies we had suspected the USD had accumulated many, perhaps too many longs. The ability of the euro (EURUSD, FXE, UUP) to gain on the USD perhaps confirms this theory. Settlement of the Cyprus banking failure was messy and acrimonious, but despite this the euro was able to rally. For the week, the open interest in the euro futures market was down close to 20K contracts. Possibly, spec shorts and longs were both liquidating. There is nothing in the weekly chart that makes us think this rally is over.

No word from European finance ministers meeting in Dublin today, and they claimed that Slovenia was not on the agenda. It seems like they told us Cyprus was not on the agenda before that situation blew up. Rumors are becoming noisier about the inability of Slovenia to sell bills needed to continue to operate the government.

The gold market is taking a big hit today, down to almost 1500 on a story that the ECB President has told Cyprus they must sell its gold to pay for the shortfall in the agreed bail out. This policy may give the gold bugs some concern. According to The World Bank, the value of Portugal gold is more than ten times the value of the Cyprus gold and the plight of Portugal is deteriorating.

Interesting times should give us trading opportunities. Let's see what the week end brings.

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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.