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George Wannabe aims to filter, analyse and ponder the thoughts and work of financial institutions, financial journalists, bloggers and economists in a constructive manner to facilitate one's quest for quality content.
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  • So Who's Right On USD/JPY? Goldman's Stopler Or THE OTHERS 4 comments
    Mar 23, 2012 5:16 PM | about stocks: JYF, YCS, FXY, UDN, UUP, JYN

    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.

    Stocks: JYF, YCS, FXY, UDN, UUP, JYN
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Comments (4)
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  • bakkbakk
    , contributor
    Comments (280) | Send Message
    Thanks for the article. I have read it a couple times now.


    So what are the bigger factors you are saying will contribute to more devaluing of the yen?


    1- I know they have written in the last monetary policy meeting minutes from the BOJ that they will continue to set the target at a 1% inflation rate.


    With that, if their inflation rate comes out at -0.1% like is expected this month, do you think they will enforce their own decisions even though they had a trade surplus this month?


    Isn't that the goal of fighting deflation to create a surplus so they can continue to buy their own bonds and fund their debt? So if they have a surplus this month won't they be in a wait and see mode until they run another defecit?


    Won't devaluing their yen too much start to hurt them with all of the imports for energy?


    I understand the reasons to devalue their currency to a point but the demand still has to be there for their exports-speaking more in terms of cars and electronics, etc(consumer exports not steele etc.). I would like to know your thoughts thanks.


    One more thing, how can they devalue their yen when bernanke keeps insisting on monetizing as a way to get us back to a recovery when it weakens the dollar? In fact he weakens the dollar if he says the words "economy" and "accommodate" in the same sitting like today usd -.6%


    What will be the next key factor that will cause sustainable weakness in the yen? The u.s. has 23 ecenomic reports and Japan has 9 this week alone. How can you sift though all of that and make a judgement when it comes out mixed as a whole?
    26 Mar 2012, 07:36 PM Reply Like
  • George Wannabe
    , contributor
    Comments (9) | Send Message
    Author’s reply » thank you for your comments will get back shortly
    27 Mar 2012, 06:54 AM Reply Like
  • George Wannabe
    , contributor
    Comments (9) | Send Message
    Author’s reply » here more on that here..
    29 Mar 2012, 03:43 AM Reply Like
  • bakkbakk
    , contributor
    Comments (280) | Send Message
    So it seems that announced monetizing from Japan will probably be the only way the yen devalues, given Japans true wealth. Thanks for the follow up.
    29 Mar 2012, 08:07 PM Reply Like
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