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The Yen Is Getting Ready to Breakdown

For quite sometime we have been rather puzzeled as to why the yen crosses (the AUDJPY NZDJPY etc) have not recovered when markets which the yen crosses have historically been highly correlated with (such as emerging market equities, the CRB, US 30yr yields, and high yield corporate bonds) have recovered most if not all of their post flash-crash losses. We think that if the current up trend in equities, treasury yields, and commodities continues it is just a matter of time before the Yen breaks down against the crosses. Of course this begs the question as to whether or not equities, commodities, and US treasury yields will maintain their current up trends. We think that they will for reasons that we have discussed on numerous posts over the last few months.

In any event in order to help us with what is really happening with the JPY we have developed our own proprietary Japanese Yen Index which is comprised of 10 currencies relative to the Yen with each cross being equally weighted, it is part of our Underneath the Radar series of indices. In essence we try to look at markets in ways which no one else looks at them.

Note just how close this index is to breaking to a multi-week high. A breakout would confirm our fundamental bearish view on the Yen. With a quickly ageing population and a massive government debt (suggesting that the cost of servicing that debt will become the responcibility of fewer and fewer workers over the coming years). 
Japanese Yen Index

A lot of our analysis is based on inter-market relationships. In essence we look for confirmation in the behaviour of one market with another.Over the last two years we have noticed that the Nikkei has had a respectable record of leading the yen crosses. We cannot help but notice that the Nikkei has recently broken out of its trading range. Will the Yen follow? Well we see little reason why not.
Nikkei 225


Disclosure: Long DBV AUDJPY Calls