USDJPY V GOLD: BEST VALUE - RISK-ON SELL JPY; RISK-OFF BUY GOLD Why Gold is lagging Safe have losses & Yen is outperforming
1. When looking at Gold vs Yen or XAUJPY it becomes apparent why Gold is lagging the broad safe haven losses that we have seen during this risk-recovery rally - investors are buying gold over Yen - so gold appears to be their preferred safe have asset to hold in a risk-on rally - likely a function of perceived future weakness of Yen? BOJ/ JPY Govt stimulus?
- This may be the case for three reasons; 1) Investors speculate JPY is due further downside gains compared to gold (Gold is the stronger Risk-off asset) and they speculate that BOJ may deliver a big devaluing package and/ or 2) They believe JPY is more overvalued than Gold so they sell their JPY holdings over their Yen. 3) Gold is more illiduid compared to Yen e.g. investors have been able to sell their Yen faster/ easier than their Gold as Gold is a physical asset and FX markets are the most liquid markets in the world - whereas Yen is pure currency which is convertible at any level.
Implications:
1. This infers that investors expect Gold to continue to outperform in risk-off rallies going forward - which makes sense given Gold is already up 30% this year vs Yen's only 20% up - so they see further upside for Gold. This could be the case as the market discounts the probability that the BOJ/ JPY govt delivers a large easing package which devalues the JPY.
- Therefore Gold shorts should be careful during this risk-on rally as when the tides change back to the trend of risk-off, Gold is more likely to rally aggressively in comparison to Yen.
Trading strategy:
1. Buying Gold on the risk-on reversal (to risk-off) - we should allocate the liquidity to Gold over Yen to take advantage of this investor sentiment.
2. The market is clearly discounting quit aggressive JPY weakness when relatively compared to other safe havens - likely due to BOJ/ JPY Govt stimulus worries.
- Knowing this, we should potentially position for JPY shorts - since the market clearly is positioning for some serious JPY weakness relatively - a big BOJ package?
3. Whilst safe havens have outperformed risk by 14% (20% safe havens 6% risk-on assets - pre-brexit) - Gold has also outperformed Yen by 7%.
- Therefore in risk-off rallies we SHOULD expect Yen to underperform Gold e.g. GOLD should be brought over Yen.
- In risk-on rallies (now) we should expect Yen shorts to outperform Gold as Yen is considered the poorer asset - USDJPY longs are better/ safe than Gold shorts (hence supporting my long $yen view).
*Check the attached posts that also support the long $Yen view in this market*
Kuroda
Will the BoJ Increase QE In Two Weeks? Doesn't Matter.With markets on edge and Japanese inflation data this week, those short the yen are hoping the Bank of Japan Governor, Haruhiko " Kamikaze " Kuroda, will further increase the balance sheet through more quantitative easing. Because when everything else fails, he'll try to go all in.
Or will he? Essentially, his brilliant idea to implement negative rates, or NIRP, was seen as a policy error even quicker than the Fed's first rate hike in seven years. Economists, bulls and bears alike, said that NIRP would do absolutely nothing for the Japanese economy. But, Kuroda didn't go from no NIRP to NIRP in a week's time to strengthen the economy. It was to deter yen strength and perk up hemorrhaging risk assets, which failed miserably.
If inflation data comes in soft, we are likely to hear the threat of quantitative easing but it is unlikely that the BoJ can match the most bang for the yen traders saw when this whole quasi-policy began. Analysts expect that Kuroda may increase the level of exchange-traded funds, a market where the BoJ already owns 52 percent , since there is virtually no more debt to purchase do to existing quantitative easing measures.
It's possible, but does not matter in the end. The global marco downturn is in the drivers seat, and a single central bank cannot change that, especially when $12.3 trillion in QE and 600-plus rate cuts since the financial crisis have barely kept the global economy spuddering along.
With global trade continuing to collapse, the weak yen facade is crumbling. January's exports fell a whopping 12.9 percent and imports dropping 18 percent. GDP contracted 1.5 percent in 2015 on an annual basis, and Japan has seen three recessions since PM Shinzo Abe took over in 2012.
External debt and the BoJ balance sheet hit all-time highs (unlike the Nikkei) .
Those nickel-and-diming headlines - be careful. As we've seen in February alone, the actions of the BoJ erased nearly eight months of gains.
Do macro, or macro will do you HARD.
I reiterate a target of 110 by Q3 and 105 by early-2017. That will likely be for starters if the US falls into recession, as forecasted . Potential pullbacks to 114.55 and 116 on central bank induced risk taking probable.
The problem with this crusade for inflation, and this goes for all central banks, by reckless measures is fiscal calamity will arise when inflation takes hold. Rates will have to increase, and debt will not be payable.
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Looking At Ashraf Laidi's 40-Month CycleYesterday, Ashraf Laidi put out an interesting post on the USDJPY and a 40-month cycle.
From April 1995 to August 1998, the pair rose just over 85 percent. In brief, in the mid-90s, the US were raising interest rates (who does that anymore? Psh), which made the dollar stronger following the recession of 1990.
The Japanese yen was devalued, too, as their asset bubble grew bigger. The Japanese saw this as the cause of the "lost decade," while it could also have been blow back from the Plaza Accord in 1985.
Nevertheless, the pair ultimately crashed 31 percent from it's 40-month cycle high. Following the Asian Financial Crisis in 1997, the Federal Reserve began lowering rates in 1998, briefly increased the Fed funds rate before rapidly lowering rates into the 2000 bubble bust and recession. (Which I believe will happen next).
Fast forward to the current 40-month cycle, spanning February 2012 and June 2015. The pair has been able to gain a respectable 65 percent, and there is no reason why one would not BFTD; but, is the pair's fate remain the same as it were in the mid-1990s?
Analysts take of a policy devergence, but really it's come to a rhetoric divergence. The Fed has yet to tighten monetary policy, and even if it does, Fed officials have opined that it would still be "accommodating" and largely based on market reaction.
We very well could see a 25-50 bps increase in the Fed funds rate over the course of several months or a year, but that is when the true economic rot will fester to the surface; and the Fed will undoubtedly reverse course.
The BoJ has admitted, no matter how many times Kuroda tries to revert course, that there are diminishing returns in regards to a weak yen.
Quasi-monetary policy can only take economic growth to a certain point before fiscal policy takes the reigns, and we have not seen that from either country.
Both central banks have embarked on massive QE programs; yet nobody wonders why in the same period the US is undergoing its slowest recovery from a recession, while Japan has had three recessions since the financial crisis. During the 40-month expansion, Japan has had three quarters of GDP growth matched with three of economic contraction.
Central banks don't see to want to believe they are responsible for asset bubble, yet they are always the root cause.
Dollar On Shaky GroundDollar bulls may be few and far between, as a potential rate hike has now become a "buy the anticipation, sell the rumor" play. Even the most hardcore bulls like Marc Chandler has taken a step back to rethink the dollar.
After making a series of lower highs and lower lows, the dollar could very well test the lows near 93; while a series of resistance levels could snag any upside potential.
Last night, a few BoJ officials wanted to move the markets with their words. For some unknown reason, BoJ Governor Kuroda blurted out that the yen was "very weak" as to lead the market to believing it was too weak.
This is interesting on a few fronts:
One, a weaker yen was modus operandi numero uno. It was not "very weak" when it was down 25, 30 or 35 percent, but that 40 percent mark is the sweet spot.
Two, this comes at a very interesting point, following the G7 meetings. The market expects the Fed to increase rates solely based on non-farm payrolls and nothing else because, frankly, the data out of the US is borderline, if not outright, recessionary.
The Fed will never hike rates into a stronger dollar. As I said many of times, the Fed will work its way into the currency war by taking down the dollar. But much like their gold charade, the Fed has someone else do their dirty work.
The dollar is typically inverse of the yen, and by increasing the yen the dollar is almost guaranteed to fall by default. A falling dollar - in theory - supports the Fed's inflation projections.
It also gives the Fed more breathing room to throw around the idea of a rate hike.
Please visit my linked idea on the dollar. It is trading very much between S/R, while maintaining the downward trajectory.
Still projecting the DXY with an 80-handle by mid-summer.
$NIKKEI - The Ending Diagonal - Abenomics Part II.'On last Thursday, Kuroda met with Prime Minister Shinzo Abe and assured him that he would do more if needed, especially if the BOJ is still failing to meet its 2 percent inflation target.
"Should conditions emerge where the target becomes difficult to meet, we are ready to make without hesitation adjustments to policy, additional easing or whatever," Kuroda told reporters after the meeting. '
Yen weakens, the Nikkei growing. Land of the Rising Sun not yet said the last word.
The next BOJ meeting ist on Oct. 6-7. Until then, the market will live in hope.
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