Selling the yen has been a big winner this year.
Actually, the move commenced in October when traders began to recognize the new Prime Minister might be Abe, a proponent of aggressive monetary expansion. For years, the Japanese had been trapped in a deflationary spiral and no economic growth. Abe's cure for the moribund economy was straight from the Keynes textbook. Have the Bank of Japan increase their balance sheet, buy Japanese Government bonds, thereby increasing the money supply would be the answer.
Against the USD, the move commenced around October, first when the pair was trading under 78. In the seven months that followed, the USD moved up to the cusp of the 100 handle. Failure of the market to conquer the 100 handle has caused a sell-off toward the 97 level.
Does this mean the bear move in the yen is over?
No doubt part of the yen strength versus the USD has been the mixed results of the U.S. economic data. Yesterday -- Wednesday -- was no exception. The ADP Employment Change report fell short of expectations. This report is an attempt to anticipate the NFP number, but their results are not very prescient. They did cite tax increases in the U.S., payroll and the increase in the tax on the wealthy, combined with some spending cuts, have all served to slow the hiring. But like most of the recent U.S. reports, recent first time unemployment numbers have decreased providing a conflicting story.
The ISM Manufacturing PMI did come in a touch better than expected, 50.7 rather than 50.5, but still down from last month's 51.3.
What is happening in the U.S., however, is of much lesser importance than the changes proposed by the new BOJ Governor Kuroda. He has indicated he will loosen the money supply, buying an assortment of Japanese maturities, and may buy foreign bonds: buying the foreign bonds might then involve the selling of yen.
Such proposals have caused the yen traders to switch positions. Once again, the yen has become a favored funding currency. Selling the yen and buying 10-year Australian paper, which pays over 3%, is one trade. The BOJ has said they are going to keep rates near zero and print lots of yen, so why not do this carry trade?
The yen had also been a favored place to park money by the safe haven seekers. A depreciating currency is not a place for safe haven seekers to park their money. Offsetting the haven money feeling has been offshore funds coming home and buying Japanese equities with the depreciated currency.
Speculators have actively sold the yen. Our most recent COT report shows the specs are short 118K contracts. Speculators have had a lot of encouragement to sell the yen. One prominent analyst has said the Japanese economy has been like a bug looking for a windshield. George Soros is reported to have made another billion from a short yen position. Another respected adviser with many listeners has said the USDJPY (FXY) yen may go to 120 or even 150. Further, he suggested buying the AUD and the NZD versus the yen, as well as selling the yen to buy gold. No surprise then, the spec is a big yen short.
There is no doubt there is risk with this graduate Keynesian adventure. Already the debt to GDP ratio is approaching 2.4-to-1. New funding is needed each year to fund the big deficit. With an aging population who had been frugal during their working years, there is ample savings to buy the JGB's, but will this continue?
A recent article suggests fund will be flowing out of Japan:
"The nation's four major life insurance companies are set to shift away from investing in government bonds, whose interest rates are expected to fall, to foreign bonds that are expected to produce higher yields.
The life insurers - Nippon Life Insurance, Dai-ichi Life Insurance, Meiji Yasuda Life Insurance and Sumitomo Life Insurance - announced their investment policies for fiscal 2013 last week.
They apparently believe that rates on government bonds will likely decline because of the Bank of Japan's policy of drastic quantitative and qualitative monetary easing."
There is another problem that will arise should the 2% inflation rate be achieved. What will the JGB's yield be then? Currently, the 10-year yields .60%. To achieve this real rate of return, bond investors would need at least 2.6%. How do you know the inflation will stop at 2%? How big will the deficit be then?
The problem I have with taking a new long USDJPY at this time is the bear stories are in the market. This is why we are here. Sure, the USD was worth as much as 120 in 2007, and we may go back there again. But the monthly chart shows seven straight months of bullish candles. Eight candles going in the same direction in any but the shorter time frames is quite rare. Despite the well advertised bear yen story, I am wary.
The chart might provide guidance for the bulls. Unable to conquer the 100 handle, the bulls are taking a break. We wonder though if the trend line, which comes into play at about 96, might not be an entry if you have dreams of running through the 100 resistance to a 105 target. A 96.50 entry with a 100 pip stop and a chance to break above the 100 resistance is an attractive risk reward. As always, mind your money.