Yen Bottom May Be In: Implications

Zero Hedge documents the end of the manufactured decline in the value of the yen vs. the USD (LINK).  This looks to be a good yen buy point, in my opinion, because a multi-year record amount of bullish positioning in the yen accompanied this decline.  One would normally expect at least a few percent reversal in the JPY-USD ratio.  Accompanying this is a sharp, even massive decline in the 10-year JGB, all the way down to 78 bps from nearly 85 bps (LINK).  In this past trading session, the rate dropped from 82 bps to 78 bps.  The best way to appreciate the magnitude of this is to think of the percentage drop in the rate.  Back in the day when U.S. interest rates were high, a drop from 8.2% to 7.8% in one trading session would have been considered noteworthy.  Move a decimal point, and the degree of movement is the same.

(It also appears noteworthy that the 2-year JGB, which seemingly forever has been pinned at the 0.1% rate (i.e., 10 bps), has for the past week or so been trading at 8 bps.  This does not happen by random.  One wonders if it is signaling yet lower rates on the longer-maturity Japanese bonds.  One further wonders if the real solution to Japan’s government deficits will not in the end be negative interest rates.  Negative interest rates in a country that has achieved price stability are, actually, reasonable.  It costs the country (the government) money to maintain a currency system.  If a bank depositor or buyer of government short-term securities wants liquidity and maximal safety, that person or company should expect to pay for that privilege.  If the level of prices, as best as it can be estimated, is not changing or even declining, then just as an owner of gold or a classic automobile must pay for storage, so must the owner of capital pay for safety and liquidity.)  

A weakening yen vs. the USD has generally correlated with rising U.S. interest rates and a rising level of stock market prices.  The reverse is also true.  The futures board shows a little weakness in stock prices in the U.S. right now.  My guess is that there is no rush to buy this particular dip.  Just a guess; the title of this blog is not The Oracle or the like.  The obvious stop-loss here would be if the yen reverses and puts in a new low.

Since I’m a long-only investor, the potential DoctoRx investment of the day is not to short stocks, but rather to buy the Japanese yen via the FXY ETF, looking for a quick profit as trend-following speculators rush out of the other side of this trade.  In other words, yen shorts may be about to get squeezed.

In line with the theme of this post, speculative long positioning in the Russell 2000 on the futures market, which is a lightly-traded contract, is at a multi-year high, and speculative long positioning in the Dow and S&P 500 futures are also quite high.  Where are those customers’ yachts, again?

The above commentary on the yen and associated markets is of a short-to-intermediate-term nature.  Often these powerful moves, with heavy speculative interest, foreshadow a strong new trend.  On that matter, we shall simply have to see.  

EmailPrintFriendlyShare

7 comments to Yen Bottom May Be In: Implications

  • [...] Zero Hedge documents the end of the manufactured decline in the value of the yen vs. the USD (LINK). This looks to be a good yen buy point, in my opinion, because a multi-year record amount of bullish positioning in the yen accompanied this decline. One would normally expect at least a few percent reversal in the JPY-USD ratio.  [...]

  • dd

    hi Doc, i really appreciate your work as we think so differently, and yet i normally walk away with a new perspective that is thoughtful.

    to me, this is a speculative play. which is fine, i’m in the business of speculation, only i think finding individual bond / stock ideas offers higher risk / reward. why bet on massive gov’t bond or currency markets when you can find some little company where the odds are stacked in your favor?

    i guess my point is that you are cautious on equities, fine, i get that and certainly see where you are coming from. but to move from that stance to a Yen play? seems much riskier than stocks to me. and yet your thesis is well-reasoned.

  • D

    Go read the latest Hussman post. If that does not give you pause on the US markets nothing will….

  • The JGB yield continues to collapse, now 75.6 bps. Normally, a declining interest rate pattern goes along with a declining currency value, but things are different in Japan. The yen is a little stronger today despite this plunge (percentage interest rate decline) in the 10 yr JBG rate. This interest rate is already closer to the December post-2003 low of 70.0 bps than to the recent manipulated high of 84.0 bps.

    The Japanese bond market is not buying this inflation story this week, that’s for sure.

    If matters stand as they are, meaning Japanese price stability, the JGB has a positive real interest rate, while all other interest rates on 10 yr govvies I’m aware of are negative. This is yen bullish IMHO.

  • [...] premium over sagging platinum – Reuters Easy money over for yen bears – MarketWatch Yen Bottom May Be In: Implications – Daily Capitalist Four leading indicators of a market top – MarketWatch U.S. [...]

  • Rigorous

    It maybe a little early to place your bets on the Yen. Darn. I wish I had bought some Sony instead going all in on the S&P 500. While I believe little of newly created money by the Fed gets into the broad economy, if stocks and real estate rise as a result of the “printing” the wealth effect will prevail. For a while.

  • [...] Read more …………. [...]