- Once again the haven buyers found the yen to be an unreliable safe destination.
- US money supply is about to slow its rate of growth and the yen supply may well increase.
- Traders think a 20 year JGB yielding 1.342% has value and the bond could appreciate - only in Japan. There are better values elsewhere.
Some of the factors in the global currency markets have aligned to give us a rally in the USD versus the yen. Geopolitical conflicts remain, but the headlines, warning of an imminent disaster which has propelled the haven seekers to acquire the yen, have abated. Instead we have the USD gaining to 103.70, the highest levels seen since early April when the USD traded above 104.
The US economic news, though not outstanding, remains positive. Yesterday, the US building permits number and the housing starts both beat estimates. The naysayers pointed out many of the new permits were for rental units, but the market didn't care. The US CPI was up a mere 0.1% for the month and now sits a respectable 1.9% for the year. This number gives the Fed no reason to fear inflation.
This afternoon the Fed released their most recent monthly musings. The Bloomberg headline, "Fed Officials Said Job Gains May Bring Faster Interest-Rate Rise," gives you their quick analysis. Some of the members rightly complain the labor market recovery remains slow, but they are optimistic that going forward it will continue to improve. There is nothing in the report that suggests the tapering off of the QE is going to slow. A word of caution, however, the Fed Chairlady is going to speak at the Jackson Hole gathering. Will she offer any new thoughts that might surprise the market?
Economic releases from Japan have been less copious this week. One of Abe's theories is a weaker yen will stimulate exports and thereby increase growth. Numbers released this week disputed that theory. The Japanese trade balance for the most recent month is negative, ¥1.02T, although it was a slight improvement from a negative ¥1.07T last month. Part of the problem is the surge in the costs of energy imports. The nuclear power disaster and the increased reliance on other imported energy sources is part of the problem. The weaker yen also makes energy imports, priced in USD, more expensive.
The Japanese are also puzzled why exports are not growing.
Initially the Japanese economy got a boost from Abenomics, but now the negative impact of the consumption tax increase in April to 8% lingers. It is rumored Abe intends to shake up the members of his cabinet in September. What policies might be altered at that time? Without better economic numbers, I suspect the BOJ will alter policies and increase the yen supply.
There was a policy review by the BOJ in late June.
The BOJ reviewed its bond purchase policy on June 18 and divided JGBs with a maturity of 10-plus years into two groups: those with a maturity of 10-25 years and those with a maturity of more than 25 years. Purchases were set at 100 billion yen ($961 million) for the first group and 30 billion yen for the second group.
(According to some traders)....The supply-demand balance of 20-year JGBs is favorable, as many market watchers see the central bank's move as effectively increasing its purchases of bonds with a maturity of 10-25 years.
Recent trades in the 20 year JGB have been priced to yield 1.342%, higher than the 10 year JGB that are yielding about .50%. These yields, however, are not appealing when compared to other sovereign debt. For example, the US 30 year long bond yields 3.22% or a 15 year Australian bond yields 3.79%. The US 10 year yields 2.42%, Italian 2.59%, or the New Zealand 10 year pays 4.17%.
Japanese traders are probably correct. The supply demand balance in the Japanese 20 year may be tightening but not because of relative value. Rather, it is because the Japanese traders are going to front run the anticipated moves by the BOJ. The logical result from the BOJ's entry into the long bond market will be lower yields, and the consequent flight of capital from Japan.
The USDJPY (FXY, UUP, UDN) trade to 1.0370 should not be considered a breakout since there are highs of 1.04, and 1.0530 earlier this year. My guess is we are setting this pair up for a run at those levels later this year. The monthly increase in the supply of USD, courtesy of the Fed, is about to taper off. Contrast this to the expansionary activities of the BOJ, and this should be a set up for a trade above the 105 handle. A current pull back to the 102.5/103 is possible but these levels should be used to short the yen.
As always, manage your money carefully.