Tag Archives: japanese Yen

Unsustainable Yen Rally Out of Gas

The Japanese Yen’s rally since their move to negative interest rates has been an economic phenomenon that I simply can’t get my head around. Perhaps a case of the government not taking more is akin to losing a foot rather than the entire leg? I suppose my lack of understanding is one of the reasons I follow the collective actions of the commercial traders in the commodity markets. While any individual can be wrong at any given moment, the commercial traders, as a group, have a knack for having the right position on at the right moments. Whether by research or algorithm by hook or by crook, there is little question in our minds which group we should be following. Today, we’ll update you on their most bearish position in the Japanese Yen in more than six years.

Continue reading Unsustainable Yen Rally Out of Gas

Yen Continues to Attract Big Sellers

We’ve been watching the Japanese Yen’s movement closely this year as it has gained strength against the U.S. Dollar in spite of the actions of the Bank of Japan and their explicit commitment to weakening their currency across global markets in order to prop up their export driven economy. We’ll refer to our story from two weeks ago to provide the deeper history. In the meantime, we’ll update a few data points that should continue to keep you watching for a dramatic turn in the Japanese Yen vs U.S. Dollar currency pair.

Continue reading Yen Continues to Attract Big Sellers

Yen Rally is Short Selling Opportunity

The Japanese Yen has rallied more than 6.5% since the their finance minister, Katayama Yano announced Japan’s shift to a negative interest rate in their latest battle to destroy their currency and create external demand thus allowing them to finally achieve their expressed desire of 2% inflation year over year. The Yen fell initially on this news but the ensuing rally has been a bit puzzling. Based on the Japanese government’s actions and intentions, we’ll chalk this up to, “Don’t fight the (Japanese) Fed” and look for selling opportunities inline with major technical resistance and their government’s intentions.

Continue reading Yen Rally is Short Selling Opportunity

Weekly Commodity Strategy Review

We began the week with Bond market analysis for TraderPlanet.  We looked at the tremendous and rapid build in the commercial 160x600trader position noting that the recent sell off may be nearing exhaustion. Based on Thursday’s reversal and ECB/IMF/Greek hope quickly deteriorating, we feel the short-term bang for the buck may be best on the long side of the market.

COT Data: We are Near a Tradable Bond Bottom

Tuesday, we focused on, “A Pause in the Yen’s Destruction.” We noted the rapid application of the Prime Minister and Bank of Japan’s plan to monetize their debt in a last ditch effort to reflate their economy. Like the Bond market, this market has seen tremendous and rapid commercial trader buying as the Yen fell to Y120 = $1.

Finally, we looked at the disconnect between nearby crude oil prices and current fundamentals. It’s hard to get bullish about supply cuts a year out when current inventories are the highest they’ve been in 80 years as we noted in the Energy Information Agency’s, ” Summary of Weekly Petroleum Data.”

Read – “Sell Crude Oil at $65 Per Barrel.

 

A Pause in the Japanese Yen’s Destruction

Currency destruction usually usually places a sovereign national bank at the pointed ends of its citizens’ collective swords. The country’s citizens watch helplessly as they wake up each morning less financially secure than they went to bed the previous night. This general sentiment is why the Japanese Prime Minister, Shinzo Abe’s popularity is counter intuitive. His political platform has been based on the public destruction of the Japanese Yen in a last ditch effort to end 25+ years of secular deflation. As a result of Shinzo Abe’s platform and with the help of the Bank of Japan’s Governor Harihuko Kuroda, they’ve driven the Yen down approximately 20% versus the U.S. Dollar in the last year. Commercial traders are making a strong case that we may be nearing the end of this decline.

Continue reading A Pause in the Japanese Yen’s Destruction

Timing the Dollar’s Run

The U.S. Dollar has been the best house in a bad neighborhood since the U.S. Federal Reserve Board announced its intentions to taper the U.S. economy off of its monthly stimulus supplements. Protracted issues in Ukraine and the sanctions levied against Russia have created a major capital flight from Eastern Europe as a whole. The European Union recently announced its own form of Quantitative Easing and finally, on Halloween, Japan dropped the mother of currency bombs. Their announcement that they would not only invoke another round of currency destruction but would also become direct investment participants in their own stock markets created a shock through the investment landscape that I’ve not heard in non-crisis times.

Continue reading Timing the Dollar’s Run

Tidal Shift in the Bond Market

The recent spike in Treasury yields could very well be signaling a change in trend direction. We rarely try to pick tops or bottoms in major trending markets. It simply doesn’t pay. However, we’re seeing lots of corroborating evidence that this may signal a shift in the global macroeconomic outlook. Therefore, this is one of the rare times when a pull back within the interest rate sector may not be a buying opportunity. In fact, if this is the beginning of the Great Unwinding we need to focus on all of the evidence to obtain a complete picture view, all the way from the trading screens to the man on the street.

The trading screens always provide the first clues of market direction. It’s important to remember that prices and yields trade inversely to each other. Therefore, when the price of the security rises, the interest rate declines. The opposite is also true. This is why we can talk about all time high prices and record low yields in the same sentence. The 10-year Treasury Note is the global proxy for US interest rates.

The last leg of this rally began in late November of 2007. The employment situation was starting to deteriorate and interest rate adjustment was the primary tool the Federal Reserve used to pump life into a faltering economy – prior to the economic collapse. The Fed lowered rates by a quarter point in four out of the last five months of 2007. They lowered rates eight more times in 2008 and finally committed to a zero rate policy in February of 2010.

The combined inventive efforts at the Fed eventually drove the 10-year rate to an all time low just under 1.5% in the cash market and an all time low on the 10-year futures of 2.3%. This is where it starts to get interesting. The 10-year Note has been trading at a negative real return for over a year. This means the interest generated by the instrument’s yield would not keep pace with inflation’s erosion of principle. The recent sell off has pushed its nominal yield above 2% while inflation is expected to remain a hair under that mark. Thus, bringing our first, “normal” look at a yield curve in ages.

The high water mark set in early May was fueled in part by Japan’s concerted depreciation of the Yen. The markets were well prepared for this. The US has provided massive stimulus over the last five years. Europe has added their share over the last three years through Greece, Spain and now, Cyprus. The logical next step in a globally competitive devaluation race was obviously a form of Quantitative Easing by Japan. Commercial traders here in the US stocked up on 10year Notes, accumulating their largest long position since February of 2008. Their expectation was that we would continue pushing the zero bound interest rate plan.

This may very well be one of the rare times when the commercial traders are just plain wrong. Historically, they’ve been very good at forecasting rate direction. This time the largest trading group may have been faked out as a whole. Two important points bring this home. First of all, their buying did fuel a rally to new highs…by a hair. Secondly, the weekly chart is beginning to show an obvious reversal bar. Will this turn into an, “Everybody out of the pool,” moment? I doubt it. However, I do expect them to continue to offload recent purchases, which will build up resistance on any attempted rallies.

The other primary point to make is the effect of the rise in interest rates on the housing market and its effect on the anemic economic recovery 99% of us have participated in. The national average 30-year mortgage has climbed by nearly 25% over the last few weeks rising from 3.4% to 4.2% according to Bankrate.com. This will have a big impact on the housing market, which had just begun to clear some inventory. This will also affect mortgage refinancing just as the deadline for governmental forgiveness approaches. The result of the spike in interest rates has caused a decline in the broad S&P 500 of nearly 4%. Meanwhile, the homebuilders ETF (XHB) has declined by almost 10%. The homebuilders have been a primary driver of the broad market’s rally since 2012 gaining nearly 100% in two years.

Higher interest rates are the last thing any of the major economies can afford. Half a decade’s worth of rate cuts, Quantitative Easing and Operation Twist, etc. have created a coiled spring of leveraged money hunting for that last bit of yield. The major reversal bar in the 10-year futures coupled with a large, unprofitable, commercial trader’s position could leave them left holding the hot potato. At its worst, this spike in rates steers us towards stagflation. An environment with rising inflation and no growth characterizes this. How far it spills over into the markets is unsure. Please call with any questions as this may well mark the inflexion point of what has been THE dominant trend over the last five years.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Effects of Deflating the Yen

The Japanese economy has been on life support since their stock market peaked in late 1989. This is also when they began to lose their productivity gains in manufacturing and technology against their neighbors. Their immigration policy and small family sizes have shrunken the labor pool to a point that even with consistent per capita GDP growth, they continue to fall behind fiscally. Their new Prime Minister, Shinzo Abe is attacking deflation in Japan in a way that makes Ben Bernanke look like a spendthrift. The obvious objective of deflating the currency is to make Japanese exports cheaper on the open market. This will grow GDP and spur new hiring thus, improving the domestic Japanese economy. The big questions are, how long can currency depreciation boost their economy, what are the side effects and lastly, will it work?

Japan is an interesting country in that they are a manufacturing country with very little in the way of raw materials or commodities to use in the production process. Therefore, Japan must import virtually, all of the raw materials they use. They’re becoming a high tech assembly country as opposed to their classic vertical production model. Their days of making the steel that goes into the car is over and so are many of the old jobs. It has become cheaper to import Chinese steel than to make it their selves. Currency depreciation will provide an initial rise in Japanese exports, as the inventory that has already been produced will be cheaper on the open market. However, these gains will be offset by newly purchased production inputs paid for in depreciated Yen.

The export market has been the key to Japan’s post WW2 growth. In fact, Japan’s balance of trade (exports-imports) had been mostly positive for 25 years before the tsunami hit in March of 2011. Prior to the Tsunami, Japan generated about 30% of its energy from nuclear power. They are currently running only 3 nuclear reactors out of 54. Manufacturing countries require large energy inputs and Japan uses more than 25% of their gross revenues to import energy and they are third in global crude oil consumption and imports. Depreciating the Yen will severely impact their energy costs. For example, the Yen has declined by 30% since November. That would be the equivalent of paying around $5.00 per gallon of gasoline, right now. This is what Japan will be paying to fuel their manufacturing centers.

This leads us to the effects of a depreciating currency on the local population. The Japanese private citizens are the ones bearing the brunt of this policy in two ways. First of all, Japanese citizens will be forced to pay more for everything that isn’t locally sourced and produced. This will trim their discretionary spending and put a crimp in local small businesses and service providers. Getting less for your money is never enjoyable. Secondly, the individual Japanese citizens are paying for the currency depreciation because the there is no international market for Japanese bonds selling at artificially low rates. The Japanese government is forcing their citizens with historically high savings to use it to buy underpriced Japanese Government Bonds. This transfers the debt from the government to the taxpayer.

I have no idea why the Japanese people haven’t revolted. I’m sure much of it has to do with culture. We tend to speak out in protest while they tend to tow the party line. It will be very interesting to see how this turns out as pensions go unfunded and taxes rise to pay for the massive social programs Prime Minister Abe has in store. Japan’s total debt (public + private) is now more than 500% of GDP according to The Economist (9/19/2012). The U.S. total debt to GDP ratio ranks 7th in the world at just under 300%.

The massive devaluation that is taking place will allow Japan to gain market share in the short term, especially against high quality German manufacturers. Continuation of this policy will put the European Union in a very uncomfortable spot. Germany is their economic leader and the country that would be hurt most in a competitive devaluation campaign. This may finally force the European Union to ease further in an attempt to remain competitive outside the Euro Zone. Easing euro Zone monetary policy may be the next link in the chain as the race to the currency bottom heats up. Finally, the pundits have coined a new phrase to help the guy on the street differentiate currency wars from fiscal policy. Welcome to, “coordinated global easing.”

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Not Quite Time for Gold to Shine

The gold futures market is still looking for support since reaching a high near $1,800 per ounce in early October. The market had fallen by nearly $200 per ounce as recently as early this month. Fiscal cliff issues as well as tax and estate laws fueled some of the selling. However, commercial traders were the dominant sellers above $1,700 per ounce as they sold off their summer purchases made below $1,600. I believe the gold market has one more sell-off left in it before it can turn higher with any sustainability.

Comparatively speaking, gold held its own against the Dow in 2012 with both of them registering gains around 7% for the year. However, the more nimble companies of the S&P 500 and Nasdaq soundly trounced the returns of each, registering gains of 13% and 16%, respectively. The relative advantage of gold in uncertain times may be running its course. There currently is no inflation to worry about and CEO’s are learning how to increase productivity to compensate for increased legislative costs. Finally, the S&P has risen by about 19% over the last 10 years while gold has rallied by more than 250%. Therefore, sideways market action in gold over the last couple of years seems justified.

Meanwhile, seasonal and fundamental support for gold hasn’t provided much of a kick over the last two months. Typically, the Indian wedding season creates a big source of physical demand in the gold market from late September through the New Year. In fact, the strongest seasonal period for gold is from late August through October in anticipation of this season. This effect should be gaining strength due to the rise of the middle and upper middle classes in India yet, the market seemed to absorb this support with nary a rally to be had. I think we’ll see the market’s second strongest period, which begins now, and runs through the first week of February provide us with a tradable bottom and rally point.

Finally, the last of the short-term negatives is the strength of the U.S. Dollar. The U.S. Dollar trades opposite the gold market. Gold falls when the Dollar rallies because the stronger Dollar buys more, “stuff” on the open market and while we’ve talked about commercial traders buying gold, they’ve also been buying the U.S. Dollar Index. Commercial traders have fully supported the Dollar Index at the 79.00 level. The Dollar Index traded to a low of 79.01 on December 19th followed by a recent test of that low down to 79.40. The re-test of the 79.00 low has created a bullish divergence in technical indicators suggesting that this low may be the bottom and could lead to a run back to the top of its trading range around 81.50. This can also be confirmed in the Euro Currency and the Japanese Yen. The Euro currency futures market has seen commercial traders sell more than 120,000 contracts in the last six weeks as the market has rallied from 1.29 to 1.34 per Dollar. Meanwhile Japan’s new Prime Minister, Shinzo Abe, has turned the country’s monetary presses up to 11 in an attempt to jump-start their domestic economy.

The absence of an expected rally in the gold market through the last few weeks leads me to believe that the internals simply don’t support these price levels, yet. Therefore, the market will continue to seek a price low enough to attract new buyers beyond the commercial traders’ value area. Typically, this would lead to a washout of some sort that may force the gold market to test its 2012 lows around $1,540 per ounce before finding a bottom.

Furthermore, the flush in gold would most likely be accompanied by a rally in the U.S. Dollar and could push it back above the previously mentioned 81.50 level. Proper negotiation and resolution of the pending debt ceiling would most likely exacerbate both of these scenarios while also including a large stock market rally. Conversely, a legislative fiasco would lead to a Dollar washout, as the global economies would lose faith in our ability to manage ourselves and treat our markets accordingly. Therefore, in spite of the inter-market, fundamental and technical analyses we will keep our protective stops close on our long Dollar position while waiting for an opportunity to buy gold at discount prices for the long haul.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Jumpstarting the Japanese Economy

The Japanese economy has languished in a deflationary environment for years. The recent Parliamentary elections have ushered in the potential for major shifts in policy, both ideologically and practically speaking. The election of Shinzo Abe as the new Prime Minister and overwhelming support for his Liberal Democratic Party will allow the new regime to control both the upper and lower houses. Therefore, no bargains or watered down policy will need to be struck. The sweeping results are a clear statement by the Japanese people that they expect action to be taken to loosen the money supply, inflate the economy and devalue the Yen.

Japan’s economy is roughly 1/4th the size of ours and places them as the fourth largest economy in the world. Therefore, full-scale policy shifts are rare and require a good bit of fortunate timing to implement. There are enough pieces in place to see more unilateral action by Japan as Mr. Abe focuses on the immediate needs of his people rather than finding the right political fit for Japan within the global political dynamic.

Deflation has been the key to the Japanese economy since the late nineties. Over the last 13 years they’ve recorded two inflationary years – 2006 and 2008. Mr. Abe wants to target new inflation and growth targets of 2% and 3%, respectively. Japan hasn’t recorded inflation above 2% annually since 1991. He expects to reach these goals through pressuring the Bank of Japan to loosen lending requirements and purchasing construction bonds for public works projects as their own method of Quantitative Easing. He also expects to include the first steps of domestic military spending to assert their claim to islands in the South China Sea as well as domestic pork barrel subsidies and governmental contracts to boost domestic GDP and help bring them out of recession.

However, considering that Japan already has one of the highest debt to GDP ratios in the world, ranking only behind Zimbabwe, Mr. Abe’s intentions are being watched closely by the credit agencies who already have Japan in a negative watch position and susceptible to further outright credit downgrades. Currently, Moody’s and Standard & Poors rate Japanese debt as equally trustworthy as countries like Chile, Macau and Bermuda. These are drops in the bucket compared to the weight the Japanese economy brings to bear on world trade. Fitch is the only rating company still holding Japanese credit at A+.

Inflating the economy by selling government treasuries is also designed to devalue the Yen against the major world currencies and help fuel their export dependent economy. The Yen has strengthened considerably over the last few years trading from a low of 115 Yen to the U.S. Dollar in July of 2007 to as high as 75 Yen per Dollar this time last year. Currently, the Yen is trading around 84 Yen to the Dollar. Japan is the second largest holder of U.S. Dollar reserves behind only China. Therefore, it could require a tidal wave of selling to make a dent in their $1.25 trillion in U.S. Dollar reserves.

The trading scenario is the mirror image of, “Don’t fight the Fed.” Japan has the financial power Mr. Abe has the political power and the support of the Japanese people. This should manifest itself as cheaper Yen and higher yields on the Japanese Government Bonds. Therefore, I expect the 75 Yen per dollar high set last year to hold and would like to sell Yen at 80. Note that these quotes have been provided in the number of Yen per Dollar while CNBC and U.S. futures quotes will show the inverse, which is what percentage of a Dollar will one Yen buy. Currently, one Yen will buy .00186 worth of a Dollar. Be careful to compare apples to apples when checking market prices.

The next big piece of this puzzle will be the inflationary effect on Japanese Government Bonds (JGB’s). The previous yield high was made in 2007 along with the bottom in the currency. The JGB reaction to the election announcement was swift. The futures have put in a full bearish reversal bar on the monthly chart. This is the first one we’ve seen in this market since June of 2003. Adding to the power of the reversal is the double top formed with the current high nearly matching the June ’03 high to the tick. Looking for places to sell Japanese Treasuries and currency as part of a long-term trade would be well advised as the timing and opportunity for real political and monetary change happens far less than the politicians would have us believe.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.