Friday January 15, 2010 - 14:37:35 GMT
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Black Swan Capital - www.blackswantrading.com
Kan you say 90.00 USDJPY?
Strengthening U.S. Recovery Lends Urgency to Fed's Debate on Exit Strategy (Bloomberg) EDITORâ€™S NOTE: As talk of the Fedâ€™s potential exit from low interest rates floods the blogosphere, Bernankeâ€™s academic history has many, including me, hesitant to expect a move higher in interest rates anytime soon (as we discussed here: Currency Currents 04 January 2010). There are still a lot of financial system issues the Fed can point at to justify keeping rates low. But that said, mounting pressure from the public to avoid re-inflating the bubble could prompt firmer, more hawkish rhetoric from the Fed ... which could have a similar impact on markets as a sooner-rather-than-later rate hike would.
China Reserves Hit Record, Lending Growth Accelerates in Challenge to Wen (Bloomberg)
Europe cannot afford a Greek default (Financial Times)
â€śI always give 100% at work:
Happy Friday! Donâ€™t work too hard.
FX Trading â€“ Kan you say 90.00 USDJPY?
I guess he was right â€“ the market will be the arbiter of prices for the USDJPY exchange rate. Itâ€™s a good thing nobody listened to the New Japanese Finance Minister, Naoto Kan, when he called for a weaker yen as an integral part of Japanâ€™s hoped economic revival.
When Kan said 95 USDJPY was probably a good spot, the market said: Is that all?
The pair had climbed a good ways (stronger dollar, weaker yen) in the months prior and was nearing the 95.00 mark rather quickly. Too quickly, I guess ... as the marketâ€™s sold off USDJPY, and itâ€™s looking like it could break back below 90.00 now. [Chart not available in text format.]
In case you were wondering, Reuters notes that todayâ€™s move lower might be due to news out of Tokyo that some US dollar positions need to be unwound ... positions related to a airline fuel hedges.
Ok, right ... you could probably care less about that little bit of information. Youâ€™re probably looking for an explanation why USDJPY has come off so sharply the entire week after touching a near 5-month high.
Well, Iâ€™d love an explanation too.
Hereâ€™s one that seems to make sense, in a perverse sort of way. There is typically a tight correlation between the USD-yen and the Nikkei; lately we have seen a bit of divergence, with the Nikkei doing better (as you can see in the weekly chart below). [Chart not available in text format.]
Some near-term divergence -- no doubt about it â€“ but should we expect a turn from one of these two, will the negative correlation resume? Perhaps the yen is signaling that recent gains in the Nikkei (risk appetite) are overdone.
If we base stock market movement on its underlying fundamentals (even assume stocks lead), maybe Nikkei overdone is the ticket.
Japan machinery orders dropped to a record low in November. [Chart not available in text format.]
The figure was the worst since record-keeping of this stat began in 1987. The concern here is that capital expenditures are stuck in a serious rut and threaten to keep a lid on growth in Japanâ€™s economy. A stronger yen would only add to this pressure. (But notice how the falling machine tool orders in the chart above tracks with the longer term path of USDJPY since 2006.)
So, what have we got here? It seems one of two things:
1) The yen is warning of a move away from risk appetite to come; will Japanese investors and international investors be fleeing the Nikkei on a poor fundamental outlook for Japanâ€™s economy in search of the low-risk yen; driving USD-yen rate down more; or
2) Does this simply represent a buying opportunity for USDJPY as talk of the NEED for the yen to weaken caused this pairâ€™s climb to become overdone?
Donâ€™t forget about the potential return to the yen as carry-trade currency of choice, as discussed here: Currency Currents 21 December 2009
John Ross Crooks III
Black Swan Capital LLC
David Newman here ...
Members of our paid service are now short EURJPY, playing for the euro to be weaker versus the yen over the next several days or weeks; already they are solidly in profit territory. This is among a few other nice open profits our Members are now sitting on.
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