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Friday January 15, 2010 - 14:37:35 GMT
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Kan you say 90.00 USDJPY?

Key News
Strengthening U.S. Recovery Lends Urgency to Fed's Debate on Exit Strategy (Bloomberg) EDITOR’S NOTE: As talk of the Fed’s potential exit from low interest rates floods the blogosphere, Bernanke’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)
 
Quotable 
“I always give 100% at work:
13% Monday
22% Tuesday
26% Wednesday
35% Thursday
4% Friday”
-Anonymous
 
Happy Friday! Don’t work too hard.
 
FX Trading – Kan you say 90.00 USDJPY?
 
I guess he was right – the market will be the arbiter of prices for the USDJPY exchange rate. It’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 Japan’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 market’s sold off USDJPY, and it’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 today’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. You’re probably looking for an explanation why USDJPY has come off so sharply the entire week after touching a near 5-month high.
 
Well, I’d love an explanation too.
 
Here’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 – 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 Japan’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 Japan’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 pair’s climb to become overdone?

Don’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
www.blackswantrading.com 
 
 
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.  
 
You can get in on this too ... with PositionTrader FX.
 
It’s our newsletter that targets forex trades with a holding period of several days or weeks, targeting major FX pairs, emerging markets pairs and key cross-rates. Members also receive market updates, price analysis, and position follow-ups to make sure they’re tuned into our every move.  We assist them throughout the trade with information and stop-loss adjustments.  
 
Click here to give it a try.
 
Please shoot me an email if you have any questions about PositionTrader FX or about signing up and becoming one of our valued Members.  
 
Thank you.  Have a great weekend. 
 
David Newman
Director of Sales & Marketing
dnewman@blackswantrading.com
 
P.S. As always, this newsletter comes with our 30-day money back guarantee if you determine for any reason it’s not right for you. 

 

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