- Chart of interest - USD/JPY
- Chart of interest - EUR/JPY
- Japan Stocks and Mr Abe - an Opportunity?
- USD/JPY and JPY crosses - is this the retirement trade?
- Update - the Graveyard - USD/JPY
- The Graveyard - USD/JPY
- USD/JPY - this time it's different!
- USD/JPY - another voyage to the dark side
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Viewing entries tagged with 'USDJPY'
The USD/JPY has been consolidating its mammoth gains of recent months tracing out a ‘bull pennant’ between 96.00/100.00 over the last 4 weeks.
Friday’s jump higher on the U.S. payrolls data occurred perfectly out of my model.
The reason I believe USD/JPY is set to resume its uptrend after the month of sideways is, apart from Japan’s incredible monetary policy program, is that USD/JPY moves are highly correlated to U.S interest rate yields and as in my earlier chart of interest documenting the U.S. 10 year bond those yields look likely to go higher in coming weeks. Thus I believe we have a more fundamental support for USD/JPY again now.
Market talk has it that massive stop loss buy orders have accumulated above 100.00 so any move through there may well see an acceleration of the uptrend.
After a mammoth rally from 94.00 to nearly 128 since mid-2012 the EURJPY cross is showing signs of fatigue.
Breaking down the component legs, the JPY has weakened massively (USD/JPY 78 to 97) over the same period, firstly on expectations that new PM Abe would gain power and bring with him super easy monetary policy ideas and then a secondary rally on expectations that Abe would install the like-minded Kuroda as his BOJ Governor. Since the inception of Kuroda the same sounds bites regarding easy policy have been forthcoming but the JPY has actually strengthened. Is this the biggest ever example of the old adage ‘buy the rumour, sell the fact’?
Looking at the EUR leg, the EUR simply looks awful. The Cyprus ‘precedent’ hangs heavily, manufacturing indexes remain mired in heavily negative territory and constant growth downgrades have been forthcoming. Indeed ratings agency S&P today lowered the Eurozone growth forecast to -0.5%, increasing the recessionary outlook.
Moving to the charts, the brief rally on the Cyprus resolution Monday was quickly reversed, the price action tracing out the bearish engulfing day which augurs strongly for more losses ahead. Supporting the bearish stance the 10/20 day moving average are crossing over to a negative alignment. On the shorter timeframes my ‘model’ has done a stellar job of capping gains and is currently pushing down suggesting strong resistance lies at 122.70/123.20 and falling.
I have profiled (ad nauseam) the potential for JPY weakness over the last 6 months of last year with good effect as the USD/JPY rose from 77.00 to 90.00 and the NZD/JPY from 58.00 to 75.00 in the same period.
What I haven’t done is document the opportunity for very large rises in Japanese stocks.
The real speed of the JPY move has come as the market came to understand that former PM Abe would once again hold power, pledging to learn from his previous mistakes as PM and essentially do the opposite (monetary policy wise) to his last tenure. Mr Abe says that in 2006 he mistakenly backed the BOJ when they raised interest rates. Following that decision the Nikkei stock index fell by half and the JPY appreciated by 40% against the USD.
Now Mr Abe is back at the helm and with his pledge to enforce a 2.0% inflation target on the BOJ, and the measures they’ll need to implement to achieve that will have to be nothing short of extraordinary. Indeed, one analyst I have come to respect, says Abe’s program will be like Bernanke’s but ‘on steroids’ !
Now to understand the potential for Japanese stocks we need to look back a bit in history. In 1989 the Nikkei Index was close to 40,000 and only this month the Nikkei was languishing below 10,000…………………incredible that the valuation of Japan’s corporate sector is currently worth ¼ of what it was more the 20 years ago. Now that’s a bear market huh? Here is a chart back to 1963 (great year that by the way!)
Now the other chart that screams that Japanese stocks are absurdly cheap is the Price to Book ratio that shows that in 2011 (I couldn’t find a more up to date chart but I understand that ratio hasn’t changed much) the index as a whole was trading BELOW is net asset backing at 0.9 !
So here’s the nib. Japan has a stock market that is super cheap (ridiculously so?) and now they have a government hell bent on cutting interest rates and printing money forcing investors back into stocks. That and the weakening JPY, which significantly helps the blue chip exporters, should see Japanese stocks much higher this year.
I’ll be spending the rest of this week looking for the best vehicles (financial instruments) to express this trade and will revert. For now I’ll buy a small amount of Nikkei and look to add a bigger amount on any dip.
The USD/JPY has attained the state that I refer to as ‘trending’. Price pushing up hard and fast against spaying Bollinger Bands . The ‘morning star’ rejection of lower levels that I documented on the 10th of November has been a wonderful indicator.
From observing this technical state in the past I’ve noted that ‘pullbacks against the trend can be quite sharp but they are usually brief by time’ (24/48 hours).
This pair, in my opinion has been incredibly depressed for a number of years, and it could really fly going forward. Why not 100+?
For a bit of perspective (and showing my age) this pair was at 250.00 when I started in FX and had been at 360.00 in the late 1960’s.
What about Gold (the store of value as central banks globally attempt to inflate their way out of trouble) versus the JPY? Check the 1 year consolidation break out!
And NZD/JPY ? The Christchurch rebuild will make NZ’s economics look unlike any other western economy and on the other side of the ledger Japan’s problems (which I’ve documented many times recently) undermines the JPY. 100 on this cross anyone?……………………….and you get paid to hold it!
A trade weighted type portfolio of each of these pairs may be vastly rewarding going forward.
This trade is progressing slowly but surely. To recap, the bones of this trade are;
# The 30 year run of trade surpluses has now turned to deficits as the Japanese turned off their nuclear power stations after the Tsunami inspired Fukushima disaster. As a result the Japanese now import the vast majority of their energy requirements.
# Japan’s demographics are poor with the population forecast to decline to 90 mio by 2055 from the 127 mio peak in 2004. Those citizens that are left will be much older too.
# The Bank of Japan has set forth on a new round of monetary policy easing. Top Japanese research house Nomura have been widely quoted recently regarding the new policy saying that the “JPY is likely to weaken due to the BoJ becoming more proactive as a result of likely changes in government leadership as well as changes at the Japanese central bank in coming months.
# …and the budding theme that we here at Edge Capital are watching with great interest is the vast supplies of cheap energy (shale gas) that the U.S is currently harnessing. We think this could be a major kicker for the U.S in coming years. Cheap currency and super low interest rates have been prevailing for 5 years now, add super lean business organisations and top it off with cheap energy. That should be one tasty cake when baked.
P.S. Got to love NZD/JPY on this basis too !
The traders’ graveyard that is USD/JPY is tempting me again.
You’ll recall this year we broke the 5 year downtrend which has promised, but failed, to deliver much to date.
We know the ugly Japan demographics, their newfound reliance on imported energy since the Tsunami (and the subsequent trade deficits – first series in 30 years) and the recent series of monetary policy easing’s which should all weaken the JPY, propelling USD/JPY higher.
To whit the charts look promising right now.
A number of factors cropped up last week that have me thinking USD/JPY may have put in a medium term low.
For a very long time now the JPY has seemingly defied all predictions, continuing to strengthen in the face of some very serious underlying Japanese economic malaise. One of the factors, apart from supposed ‘safe haven’ JPY buying (to be fair I’ve never understood that particular concept with regard to the JPY) which may have caught the market out in the last year or so may have been the boost the Japanese economy received from activity surrounding the Tsunami clean up.
Anyway, things look a little different to me now in the wake of the FED decision of last week. The USD/JPY has long been highly correlated with movements in medium term U.S. interest rates. Last week they rose. It’s my belief that if forthcoming U.S economic data comes in ‘good to solid’ going forward then the market is going to fret that the FED may potentially overinflate the economy and thus will drive medium term rates higher. That’s a definite positive for USD/JPY.
Turning to technical factors a couple of charts support my case.
Fig 1 – Weekly USD/JPY. The base case. Remember my chart of the 5 year downtrend being broken earlier in the year?
Fig 2 – USD/JPY Weekly. A closer look. A potential reversal week in the form of a ‘doji’ where USD/JPY tried to fall but ended up being strongly repulsed from the lows. This indicates solid buying demand and a higher close to this week should confirm the case.
Fig 3 – Chart of Honda v USD/JPY (sourced from the Gartman Letter). This highly correlated overlay suggests that USD/JPY should be higher (or Honda lower of course!).
Lastly, market chatter on Friday had it that the BOJ was checking rates. Now this is a common enough occurrence and doesn’t mean that the BOJ will intervene but I can tell you that intervention doesn’t occur WITHOUT the BOJ first checking rates !
The USD/JPY jumped sharply in response to the FED’s relative lack of new easing programs, tracing out a simple ‘bullish engulfing day’ in the process. The technical set up simply looks like a break of the recent downtrend, consolidation and then the green shoots of a new uptrend.