Usd/jpy

Theme for the week: concept sound, execution poor.

I started the week bottom picking the YEN, hoping to imbibe the last whiffs of wind in one-year long dollar sail. Afterward, my confirming price rise in near month YEN future, .008300, was met as I predicted at week's start. Problem is I didn't ACTUALLY buy! I choose instead to bargain hunt, which did not work out.

Then, last night, Bank of Japan hawkishness on interest rates -- perceived as hawkish -- scattered remaining dollar trend followers and their rickety bids. No bargain left to hunt.

 

good call on that - however both the yen and the euro are in such relatively narrow ranges on a daily basis at the moment that it is tricky to trade in general, this could whipsaw either way from here, i look forward to seeing if and how they will move this situation before the end of the year...

 

i guess the Fed next week perhaps will serve as a catalyst for starting some more movement.

 

This carry preference for the dollar strikes me as extremely herdish. And I believe all the herdish factors have passed the point of being fully priced in.

So, although I normally would agree that Federal Open Market Committee news would be critical, I don't see it now -- next week in particular. I believe dollar has topped and next week's news and the price action that follows it will confound price predictions that are framed in terms of and based upon Fed action.

I am resigned to my failure to bargain hunt the top. Overnight and this morning, I have taken multiple long positions in the YEN near month, bought between .008310 and .008300, with stops to be set at just under .008200.

 

.008200 is where your stops are ha. That would be about 122.00 in the spot market. Hey. It looks like you and fertonadvisors share the same stop. He said that he would throw in the towel on his 5 short USDJPY positions at that price. Looks like you have a trading buddy. He started shorting from 115.70. I recall that he told me that he knew what he was doing.

 

Chood,

I agree and think its not just the dollar but the whole G7 FX universe where carry thinking is dominating. Even 'The Economist' made the guffaw of saying that higher interest rates mean a stronger currency. Everyone is talking about this 'free lunch' as if it is a way of life, when infact it is not.

History suggests the inexperienced carry traders could be in for a nasty shock. I'll admit I am long USD/JPY but this is not purely as a carry trade. (I am also short the kiwi).

Interesting correlations: the Nikkei & USD/JPY

I find the relationship between USD/JPY and the Nikkei fascinating. See blog for charts.

It is clear that both the Nikkei and USD/JPY have been moving in tandem in recent months. From the outset, this could present somewhat of a puzzle to investors who may think that strong stock market returns should be good for the home currency. So why is the yen depreciating when the Nikkei is marching higher? I present some possible answers:

1) International investors have been buying Japanese equity securities (international demand for Japanese bonds is likely very low given the yield and eventual possibility of monetary tightening). The majority of equity investors are not in the business of speculating on currencies and so are buying USD/JPY and EUR/JPY as a hedge. With the Nikkei on a rising trend, investor holdings of Japanese equities are growing in size, which in turn requires further selling of the yen to maintain hedge effectiveness.

2) While flow data supports the hypothesis that international investors are indeed buying into Japan, what are the Japanese investors doing? Surprisingly, they are investing outside of Japan. A consequence of the improved economic outlook for Japan is an increase in the risk appetite of Japanese investors. However, since Japanese investors have been burned by the domestic equity market, reduced risk aversion translates into an increased flow of investment in to international equity markets. This puts further downside pressure on the yen.

3) The Japanese authorities are highly unlikely to end their zero interest rate policy (ZIRP) any time soon. This is good for the Japanese corporates and with interest rate differentials in vogue in the currency market, is a negative for the yen.

4) A weaker yen boosts the revenues of Japanese exporters, boosting the Nikkei.

5) A weaker yen further eases monetary conditions which is Nikkei positive.

Correlation and causation
As a macro investor its imperative to have an appreciation of the possible drivers of a currency (note, these will change over time). At the same time it is important to realise that relationships are dynamic, often difficult to discern, and can be prone to total reversals. For example, the idea that a weaker yen boosts the earnings of Japanese exporters and supports the Nikkei is perfectly valid and can be observed in the data, but at the same time, the causality in this relationship is not unidirectional. A rapid decline in the Nikkei for example, has also been associated with a weaker yen (despite the above observations). That there are similar two-way relationships between financial markets and the real economy only adds to the complexity.

Nobody said macro investing was easy, but it sure can be fulfilling when you get it right.

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I just went short at these levels, anticipating bounce in the Yen. Using tight stops.

Here is some interesting commentary from Don Coxe that covers the Yen:

http://bmoharrisprivatebanking.com/webcast.asp

"But apart from this kind of thing, the banking system in Japan seems to be relatively well-healed from its desperate position of the 1990’s. So why is the Yen collapsing? And what is the point at which China forces a halt or openly challenges Japan on what amounts to a stealth devaluation?

Now, this is a very serious story. Because if the open spat between Japan and China, which has been accelerating in recent months, if it gets into something worse and we’ve got this Asian conference coming up where China has made it clear that it doesn’t really want to deal with Japan. They’ve turned down opportunities for meetings between Hu Jintao and Koizumi. We’ve got an emergence here of something which is beyond the bad relations that have characterized this Japanese-Chinese relationship for the last couple of years.

Now, as you know, I’ve taken an optimistic view of this, that Koizumi was negotiating a tricky path between the unregenerate nationalists and die-hards like Shinto Ishihara, who’s the mayor of Tokyo prefecture and others within his own party and he’s clearly been one side of The Great Symbiosis relationship, because the buying of Treasuries to manage this relationship, most of it has been done, of course, since the bear market of the Dollar which began on February 1st, 2002. So if you look at that chart, what you see was this was a period of time when he orchestrated a rise in the value of the Yen to satisfy China and did it at a time when he was buying all these Treasuries. He was doing more than his share of supporting that relationship.

So it’s puzzling, in a way, to see that they are prepared to let this relationship deteriorate. Now, we’ve had a couple of geopolitical incidents, once where there was a Chinese submarine in Japanese waters and this open battle over the rights to oil and gas in the straits between the two countries, but I guess I was of the view that cooler heads would prevail on both sides, that it was convenient for both Chinese and Japanese leaders to let unpleasantries be aired in public but that nothing serious would come from this. This was just a way of letting steam blow off from their own nationalists.

Well, it’s always difficult if you unleash an essentially racism and nationalism, it’s always difficult to rein it in when you think it’s reaching the toxic stage. And what alarms me, frankly, is looking at this chart, 1.22 on the Yen was the level that the Chinese indicated to the 325 international banks that bailed out Indonesia in August and September and October of 1998, 1.22 was what they said was the minimum level that they would accept for the Yen. Well, Japan, as you can see from the chart, drove the Yen almost to par on the Dollar.

So now, we’re trading at 1.20 – 1.21 range on the Yen, which is uncomfortably close to 1.22, which is the line in the sand which Japan drew seven years and two months ago. So, I don’t know whether China has revised its range for the Yen, this is all conjecture. It’s conjecture based on external evidence and extrinsic evidence as opposed to any statements or policy bulletins.

But the reason I’ve chosen to draw it to everybody’s attention, is that this fall in the Yen is a major global development. It’s clearly behind this breakout in gold. It’s probably contributing that 18-year high in silver and it’s one of those things that could destabilize the system."

 

The yen was at 133 four years ago- what happened to the "line in the sand" then?

 

Maybe you all should wait new year for shorting usd/jpy
Remember what happen with eur/usd on 1.1 2005

 

I appreciate your comments and agree completely with your point #4. In fact, earlier this year, in late July, I bought the Nikkei 225 (CME contract) for that reason, plus one other reason. Here's my post from July 27th:

"Time to go long NIKKEI 225 future. I've been waiting since sharp dip earlier this year, and the move up appears confirmed and for the long term. Among other reasons, pessimism about 2005 profits appears priced in (ripe to be priced out), and the dollar appears stubborn above 110.00 USD/Yen, ensuring excellent profits in USA for exports. The latter comes on the heels of a 2004 record year, percentage wise, in that respect."