On June 16th we published a note 'Japanese Stimulus Plan Unveiled,' and concluded this article by saying:
For the past six weeks the USD/JPY has been coiling into a triangle, getting ready for a move......There are many Japanese exporting companies whose profit can be enhanced by proper positioning in the yen, and you can be assured they have technicians studying the triangle chart pattern. Note what happened when the trend line was broken on March 24.... This market, in the futures, is fairly even. A breakout in either direction should give us a nice move. We intend to watch carefully and go with a break out.
The market did indeed break to the downside from the triangle formation a little under 91, plunged to 87, and has yet to bounce from the bottom. During the two week period from June 15 until June 30th according to COT data, the total open interest for both the futures and options climbed from 94,986 to 137,810 contracts. Large speculative buying has been the feature during this period as they aggressively bought the yen, but the small spec was also an aggressive buyer, as equities head south and the yen firmed on safe have demand. Buying the yen has continued this week with yesterday's open interest for futures was up almost 7,000 contracts.
Some of the buying may have been technically motivated but PM Kan's approach to deficit reduction may have inspired additional interest. As yesterday's editorial in The Japan Times Online noted:
Prime Minister Naoto Kan's call for supra-partisan discussions on a consumption tax rise and the government's long-term fiscal management plan announced shortly before the G20 summit show that the Kan administration has become serious about reducing the national debt. As a deflationary trend continues, the government will face a difficult task of reducing the government's reliance on bond issuance while putting the economy on a stable recovery path.
The central government's outstanding debt is ¥862 trillion or 180 percent of the nation's gross domestic product. The corresponding figure for Greece, which has suffered a sovereign debt crisis, is between 130 percent and 140 percent. Unlike Greece, most of Japan's debt is owed to domestic investors. But Japan cannot postpone the task of restoring health to its finances. Still hasty efforts to reduce debt could stymie the economic recovery and result in shrinkage of tax revenues.
The USD has lost to the yen, as it has to the pound and the euro, with all three groups now paying lip service to addressing their deficits. We are reluctant, however to buy the yen on this strength for a number of reasons.
- Equities seem to have found their footing, and with earnings comparisons forthcoming shortly, this may be helpful. Remember last year's numbers suffered as we were in the initial stages of recovering from the recession.
- The stronger yen may give comfort and profits to the safe haven buyers, but this strength puts the many Japanese exporters at a competitive disadvantage. Will the collapse of the euro versus the yen enable Porsche and Mercedes to export more of their cars to Japan. Look for the exporters to lean on PM Kan to at least try to jaw bone the yen lower.
- Japanese savers can also benefit from the strong yen. Granted, the US 10 year note yields only 2.97% but this is a rich return compared to the 1.15 yield on 10 year yen paper. Selling the strong yen and buying the higher yielding US note might be appealing.
- Finally the yen has had a strong move, but at the moment the RSI is down to an oversold 25, and the MACD is going off the bottom of the page. Yes, markets can stay oversold for lengthy period, generally until the losing traders capitulate. Perhaps we are not there yet, but we see little merit is staying with the long yen, after the nice run.
Disclosure: No positions