Friday August 18, 2006 - 10:22:01 GMT
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Black Swan Capital - www.blackswantrading.com
Oh where or where you yen...
â€˘ Australia's central bank is more likely to raise interest rates again than to leave them unchanged. (Bloomberg)
â€˘ The euro hit a record high versus the yen on Friday.
â€˘ Key Reports (WSJ):
9:45a.m. Mid-Aug U Of Mich Consumer Sentiment Index Consensus: 83.9. Previous: 84.7.
Potential reason for yen weakness and why the â€śAugust effectâ€ť i.e. strengthening yen on repatriation isnâ€™t in play this time:
â€śAfter a brief period (April to early June) which followed hawkish statements from the BoJ and from finance ministers at the Washington DC IMF meeting, Japanese investors are once again exporting large amounts of capital. This is the explanation that makes the most sense to us for it helps to explain a) the strong US TICS data, b) the rebound in global markets, c) the odd divergence in Japanese monetary data, namely the collapse in the monetary base, combined with the solid pick-up in bank lending and the mild growth in broad monetary aggregates.â€ť
Traders used to believe any strengthening of the Chinese yuan would automatically equal stronger yen. Traders used to believe the yen rallies every August on seasonal repatriation. Maybe many still do. And maybe it will all come to pass. But we ainâ€™t seeing it yet.
And the fact that we have seen such weakness in yen leads to the belief, as in Quotable above, that Japanese investors are shipping their yen offshore. The implication being Japanese investors believe domestic interest rates will remain low and the yen weak for a while. If this is true, it might also indicate many would be enticed back into the favorite trade among hedge funds, we are toldâ€”the ubiquitous yen-carry trade.
And itâ€™s the yen-carry trade that has funded much of the growth in leveraged offshore investments for funds. And though we still believe slowing growth and rate hikes from central banks are bad for commodities and spec trades across the boardâ€”if the yen-carry lives, it could provide a buffer to tightening central bank liquidityâ€”supporting the buy commodities 24/7 mantra of some market commentators. (And if the belief the next move by the Fed is down, gets some legs, it would be yet another buffer.)
But, a lot of people are playing for continued yen weakness, based on the latest Commitment on Traders Report. The yen futures contract traded on the Chicago Mercantile Exchange reflects a large relative short position (though the overall number of open contracts is not extreme) among non-commercials or punters like us; itâ€™s a setup that suggests there is plenty of firepower for a change in trend.
Once again we are stuck in Orwellâ€™s Doublethinkâ€”two simultaneous thoughts and both believed. Not a comfortable place to be, yet seemingly a chronic condition for us lately.
Jack Crooks, Black Swan Capital Black Swan Subscription-based Service
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