George Wannabe's  Instablog

With most technical analysts focusing merely on technicals it is no surprise that most financial houses have turned extremely bullish on the pair. Yes, USDJPY broke through a long term trend so let the Dennis Gartmans, Jim O Neil, Albert Edwards, UBS and others tell us that it is time for the Yen to drop and the USD to flourish. Apparently the BOJ's latest move made the trick.

We are also very bearish Yen but for as we think the light will probably soon shine on Japan's fiscal house and the BOJ will have to devalue aggressively. Furthermore as you can see on the chart below, the US 2y yield having hit close to 0 and being effectively pegged (apart for the recent bout of optimism/see Albert), there is little reason for the Yen to go much higher or the USD much lower as a matter of fact.

Except of course for those real yields as explained earlier. Goldman's Thomas Stopler courtesy of Zerohedge argues:

"As we have been pointing out for some time, there is a substantial risk that the sharp move in the JPY will reverse at least partially in the new fiscal year. Seasonal patterns point in that direction. In addition, we have also highlighted that the recent deterioration in the trade balance was likely driven by temporary factors, and our Japanese economists expect the current account balance to remain in surplus in the next few years.The surprise improvement in the February trade balance in Japan supports our view and we are now also coming very close to fiscal year-end in Japan. This news comes against the backdrop of substantial speculative short Yen positions, according to our Sentiment Index and IMM data. Unwinding of these positions could therefore be an important driver of $/JPY weakness.The perception after the February BoJ meeting was that the bank was changing its stance, another important factor for the Yen. The central bank sounded more committed to achieving a re-defined 1% inflation target and in a more front-loaded manner, so we do believe that some real shift has occurred. That meeting also coincided with the beginning of the sharp Yen sell-off. However, the subsequent March meeting failed to follow up with additional easing measures, which led to some re-assessment by markets of the extent of the change in BoJ policy.In contrast, we continue to expect QE3 by the Fed, which would suggest that the Fed remains more dovish than the BoJ. Monetary policy differentials therefore imply the recent move in $/JPY was too large. This is also visible in the correlation with rate differentials, where USD/JPY appears to have substantially overshot the moves in rate markets.We would recommend investors go short $/JPY at current levels of 82.80 for a target of 79 with a stop on a close above 84.50.

I tend to agree with him short term. The collapse of the yen will not happen when all pundits have called it. Real rates are positive in Japan and negative by more than 2.5% in the US! As long as the FED keeps those real rates so negative, it will be difficult for USDJPY to make much headway without further very aggressive BOJ/MOF action to counter the complete alienation of its economy or some kind of sovereign crisis.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The chart below shows why Mr Bernanke is in no hurry to tighten. Inflation expectations as measured by treasury breakevens (he spread between treasury bonds and TIPs) which is the Fed's favourite gauge is well in check....and he might be just right not to do so...

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I have been a long beliver that Italy should be fine but Spain is very very troublesome. I will spare the details for now but the main diffrence lies in the private sector leverage. The Italians are rich, they have no debts and no real estate bublles. The Spanish are the complete opposite with and so are their communities. The mess might just be too big to fix in Spain and the extremely high youth unemployment will not help! That explains why the Spanish spreads are satbel but not coming in despite LTRO and why the IBEX is well....the WORSE by a mile