In the 1999 film The Matrix, there was a particular scene where Neo saw the same black cat walk past a door twice. This was his déjà vu. This was a glitch in the Matrix.
The recent decline in the US dollar versus the Japanese yen as well as the decline in the US ten year yield can be described as a glitch in the matrix. This was not caused by machines altering code to intercept their enemies but rather a blip in the labour market report. The declines in these assets should not faze traders but rather should be seen as a buying opportunity as the Fed and the BOJ appears to stay on their policy course. Traders looking to take advantage of this dip should consider the ProShares UltraShort Yen ETF (NYSEARCA:YCS).
The Black Cat
The black cat in this scenario is the unemployment data. The coldest December since 2009 in the US, and above-normal snowfall forced workers to remain at home which restrained hiring numbers. As a result employment only rose by 74,000, the smallest gain since January 2011. This, coupled with more people leaving the labour force, led to a drop in the unemployment rate to 6.7%, the lowest since October 2008. However, this glitch has not put a dent in the trend of the unemployment rate. The chart below shows the initial claims for unemployment and the unemployment rate.
The unemployment data plays a critical role as it is one of the key metrics the Fed utilizes in deriving its data-driven policy. Through FOMC statements and Fed minutes the Fed has repeatedly indicated that it will reduce its quantitative easing (QE) operations as the labour market improves and increase its Fed funds-rate as inflation picks up. In line with public proclamations, the Fed reduced its purchases of agency mortgage-backed securities from US$40Bn per month in December 2013 to US$30Bn per month beginning February 2014. Similarly the Fed reduced its purchases of longer-term Treasury securities from US$40Bn per month in December 2013 to US$35Bn per month beginning February 2014. This is despite the disappointing jobs data in January as it appears that the Fed recognized it as a glitch.
For the Fed's outlook on GDP, unemployment and inflation, please see the charts below.
By diagnosing the January jobs data as a glitch in the matrix, traders can take advantage of the drop in the US dollar versus the Japanese yen given that since the Fed is expected to continue to reduce its QE and the BOJ is expected to remain accommodative, the US dollar should appreciate versus the Japanese yen. At the last BOJ meeting in January the central bank stated that it will maintain its current monetary policy. That means that the BOJ will continue to purchase Japanese government bonds (JGBS) so that their amount outstanding will increase at an annual pace of approximately 50 trillion yen, and the average remaining maturity of the BOJ's JGB purchases will be about 7 years.
The BOJ will also purchase ETFs and Japanese REITs (J-REITs) so that their amounts outstanding will increase at an annual pace of about 1 trillion yen and about 30 billion yen respectively. In addition to these measures the BOJ will also maintain the amounts outstanding for CP & corporate bonds at approximately 2.2 trillion yen and 3.2 trillion yen respectively. Finally, the BOJ stated that it will maintain its target for inflation at 2% and will continue to remain accommodative until its target has been met.
The divergent policy trends between the BOJ and the Fed suggests that the Japanese yen should weaken against the US dollar. Traders should look at this decline as an opportunity to re-enter a long position in USDJPY or purchase the Ultrashort Yen ETF .
I Know Kung Fu
After making a high of 105.456 on the 2nd January 2014, USDJPY broke its uptrend and then proceeded on a downtrend during the January month. This downtrend culminated into a falling wedge price pattern where the target for completion is set around 98.822. However, USDJPY recently entered a support zone around the 100.642 to 101.538 price region. Market positions on USDJPY also suggest a support bias.
The charts below show the daily chart of USDJPY as well as the client market positions of two forex brokerage firms.
Given the fundamental and technical indicators mentioned above traders and investors should consider an initial position in YCS when USDJPY is in the support zone, and exit the position in the event USDJPY breaks below 100.642. An exit target should be set when USDJPY trades above 101.538.
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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.