An article we wrote on February 1st, we rhetorically asked about a place to sell the yen. Looking then, at the latest COT report available, we noted that speculators were long the yen, and according to the daily CME reports, were adding to those positions. The total open interest in futures increased to a high on February 3rd of 181K contracts.
Speculators were also an unbalanced short in the euro so it was our suggestion to buy the EURJPY which closed that day at about 99.80. Should specs rid themselves of either their long yen or short euro, you have a chance to make money.
If you had taken the trade and still held it today you would have been about 460 pips to the good. This is not to say this would have been easy money, however, as there were new hourly stories about the Greek saga.
The trade worked because the Japanese economic news was bearish. The spec was long and wrong and had to blow his position, taking the open interest in futures down to 150K after yesterday's trade.
There was bearish fundamental news in the yen (FXY) this week. On Sunday it was reported the Preliminary GDP q/q was a negative 0.6%, worse than expected. The Preliminary GDP Price Index y/y was , as expected, a negative 1.6, indicating more deflation. This prompted action by the Bank of Japan who said they would increase their version of QE by another ¥10T ($128B) per year and have an inflation target of 1% per year. Interest rates would be kept near zero.
Earlier in the month there was a report that Japan had suffered their first trade deficit since 1980. It is easy to attribute this to the earthquake and tsunami in Japan, and the disruptive floods in Thailand but there are some other reasons. According to a recent article in The Economist, Japanese manufactures are losing their competitive edge.
They note:
"IN TOKYO’S posh Ginza shopping district the Apple Store is packed, but the nearby Sony showroom is as lifeless as a mausoleum. In recent days the largest Japanese gadget-makers said they expect to lose a combined $17 billion in the financial year 2011. Panasonic alone expects to lose $10 billion. Meanwhile South Korea’s Samsung enjoyed profits of $15 billion and America’s Apple hauled in $22 billion.
Too many Japanese firms make similar things. No fewer than eight crank out mobile phones; more than ten make rice-cookers and six make televisions. The overlap is inefficient: it duplicates research and development, reduces economies of scale and destroys pricing power.
Companies often stay in markets where they cannot compete. This wastes huge amounts of capital. Rather than sticking to what they do best, they bleed their strong divisions to feed their losers. This is not sustainable. Fitch, a ratings agency, recently downgraded the debts of Panasonic and Sony to one notch above junk status and placed Sharp’s on negative outlook."
Japanese firms have long been complaining about damage to their bottom line by the super strong yen. It looks like some relief is coming, but only after severe damage to many Japanese companie's balance sheets.
With weakening Japanese economic fundamentals, a targeted inflation rate, an abundant supply of yen, low interest assured for a lengthy period, the Japanese yen now looks like the leading funding currency. Speculators will borrow the yen and buy higher yielding currencies.
Among the major currencies the highest yielding currency is the AUD. We have considered buying the AUDJPY, but after the very strong six week bull run we are wary. Perhaps it will continue, especially if there is solution for the Greek saga. We, however, are more inclined to wait for a pull back in the AUDJPY. Also, because the specs are long over 90K contracts of the Aussie we are cautious.
A long in the CADJPY looks interesting. The pair has had a good run this week poised to close at the highest level since August. Currently trading at 79.50, should the trend continue, a longer term objective of 86 seems possible. If we get a pull back early next week, lets try to buy this pair. The US economy is strengthening, beneficial to the Canadians and the Japanese economy has problems. This could be a longer term trade so scaling into multi unit position might be an approach. As always identify your risk prior to entering the trade.
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