Don't Forget the Yen

by Ashraf Laidi
Nov 10, 2009 16:34 | 611 Comments

Much has been said about the US dollar's role as a funding currency for carry trades and its well publicized rebound during the most recent episode of risk aversion (Oct 21-Nov 2). But once again, it was the Japanese yen that outperformed the US dollar as well as all major currencies. This helps explains why the emerging gains in non-USD currencies (EUR, GBP, AUD, CAD etc) remain limited against the JPY when equity markets are on the rise and are quick to lose ground vs. JPY than against USD. Both USD and JPY pay ultra low interest rates, with 3-month LIBOR at 0.27% and 0.32% respectively. But the medium term future prospects remain brighter for JPY relative to USD.

While the Federal Reserve is seen injecting emergency liquidity well into Q1, the Bank of Japan will conclude its program of purchasing of corporate debt by year-end. And with continued record bond issuance from the US treasury seen further lifting the US financial deficit to above 11% of GDP (vs. 8% for Japan), the secular case against USD shows no signs of abating. Meanwhile, as commodities respond positively to favourable dynamics for the global economy, the US dollar should once again underperform the yen.

Especially During Risk Aversion

While both USD and JPY expected to outperform other currencies during risk aversion, JPY could outshine USD during the next episode falling appetite as markets exploit it as an opportunity to sell the greenback. During the most recent period or risk aversion (Oct 21-Nov 2), the USD rebound was well publicized as the currency gained 2.6%, 3.4% and 3.8% against GBP, EUR and AUD respectively. But USD lost 2.7% against JPY, thereby, leading JPY to post greater advances versus those currencies than USD.

With each and every rebound in the US dollar being strictly limited to pullbacks in global equities (G5 and EM), the emergence of such episodes does not augur well for the prospects of any looming exit strategy by the Fed. Last weeks policy decision from the Fed and BoE confirmed that neither central bank plans to reduce liquidity before end of Q1, while the ECB maybe expected to do away with its 1-year tenders operations after its year-end review. A continuation of these policies means broader downside for the US dollar, but not necessarily so for the other funding currency the Japanese yen.
As USDJPY remains capped at 91.50, EURJPY, CADJPY and GBPJPY will likely face considerable pressure at 135.50, 85.50 and 151.50, for interim targets at 132.70, 83.80 and 148.40 respectively Selling yen crosses (buying yen) at the next wave of risk aversion should be considered--even if the media dominates the headlines with the a USD rebound. We continue to watch the 100-week MA in S&P500 (1090), 50% retracement of the decline from the 2007 high to the 2009 low (1120) and the 100-week MA in oil (81.90) as indicated in our prior piece.

Don't Forget the Yen - Usdjpynov10 (Chart 1)

Don't Forget the Yen - Yen Crosses Nov 10 (Chart 2)

Comments (Showing latest 10 of 611) View All Comments
said
mulhouse, France
Posts: 2822
10 years ago
Feb 22, 2010 21:48
THANKS ASHRAF
Ashraf Laidi
London, UK
Posts: 0
10 years ago
Feb 22, 2010 21:47
said, i see your message "QuasarNR1". you cannot send me Direct Message on twitter if i do not
follow you but i can DM you if you follow me. you can just post a tweet @alaidi and i can read it.

i did reply to you on twitter.

Ashraf
said
mulhouse, France
Posts: 2822
10 years ago
Feb 22, 2010 20:24
ASHRAF

there might be a pb on tweetdeck cause i tried severall times to send you a tweet and that tells me that ALAIDi doesnot follow you and so i never can re"ceive answer to my tweet.
can it be solved? and how ? THXS
said
France
Posted Anonymously
10 years ago
Feb 22, 2010 19:28
HI ASHRAF

the probable resistance at 10475 for the dow is giving me a signal for UStreassury long and an inflow in usd against CHF. i expect an intermediate support at 1.0637 for usdchf
what do think about?
Eelman
Maine, United States
Posts: 93
10 years ago
Feb 22, 2010 18:17
Went short cad/jpy 87.49, also short gold and oil.
Ashraf Laidi
London, UK
Posts: 0
10 years ago
Feb 22, 2010 17:10
KIM, thats great.. take and run.

AVG, regarding the pullback, we may see 87.40-40 but theres more downside ahead. 86 is prelim target.

Ashraf
A_V_G
Singapore, Singapore
Posts: 38
10 years ago
Feb 22, 2010 17:03
Hi Ashraf,
Thks for confirming again...

Do u think we can still go for a Short on EUR/JPY and CAD/JPY again, or shld we wait for a pullback and reenter again....

Thks again for evrything.....
Ashraf Laidi
London, UK
Posts: 0
10 years ago
Feb 22, 2010 16:46
when i first came in the office, i saw CAD best perfomer of the week, but was starting to turn corner. And no commodity currency can rally for 9 straight days in such a risk averse environment. the 4-hr and daily stochastics looked very dismal.


AVG GC, time for JPY to wake up and EURJPY is another attractive short besides CADJPY. 122.80 looks very plausible for now.

Ashraf
KIM443
BRAMPTON, Canada
Posts: 7
10 years ago
Feb 22, 2010 16:45
Hi Ashraf, glad to report just over 200 pips to the good on trades by just following your IMTs and tweets of today:

Shorts: EUR/JPY 70 pips; CAD/JPY 84 pips ; USD/JPY 31 pips
Long: USD/CAD 18 pips

Took your advice about not being too greedy, so have taken profits. Will wait for pullbacks for re-entry...

You are just amazing, Ashraf!

Regards

Kamall
New Pip
birmingham, UK
Posts: 84
10 years ago
Feb 22, 2010 16:38
Ashraf Thanks for the CAD/Jpy - Got some pips of it - Thankyou