Yin Yang of Yen & Yields

by Ashraf Laidi
Dec 11, 2012 13:04 | 5 Comments

Yin Yang of Yen & Yields - JGB10JPY Dec 10 (Chart 1)

ESCALATING JPY SHORTS VS USD in the Chicago Mercantile Exchange show the highest negative positioning (90,000 contracts) in the currency since the June 2007, but that remains far from the (188,000 contracts) record reached earlier that same year. Back then, USDJPY was at a 5-year high of 124.14, global equities hit new records, private equity deals were raging with extreme leverage and even busts in US mortgage providers were still under the media radar.

ALSO IN JUNE 2007, yields on 10-year Japanese government bonds jumped by more than 40 bps to exceed 1.80%. The yield rally was broad throughout the global sovereign complex, prompting Japanese investors to flee zero interest rates to chase returns abroad. Unsurprisingly, yields on the US 10-year note also a hit a 5-year high at 5.32%.

Today, the yen is entering its 3rd consecutive monthly decline amid expectations that LDP head Shinzo Abe will force the Bank of Japan into extreme easing of monetary policy when he is likely to win the elections on Dec 16. Stepping up military and construction spending and pressing on the asset purchases accelerator are part of Abes goal of attaining a new 2-3% inflation target.

RESULT: Yen is falling in spot and futures FX markets, while global equities are flirting with new highs for the year.

BUT THE MISSING LINK REMAINS IN BONDS. Unlike in 2007, when global yields were triggered by an overheating global economy and elevated inflation pressures, global yields today are mired by margin suppression, financial repression, interventionist central banks and continuous downgrades of global growth by the IMF and all major central banks. 10-year JGBs remain adrift at generation lows below 0.70%, while their US counterparts are 30 bps above their all time lows.

With the yen falling at such rapid pace despite languishing yields, a mere bounce in bond yields would quickly intensify the selling in the Japanese currency.

Thus, IN ORDER FOR JPY SHORTS to breach above the 100,000 contracts territory, markets may need some help from further run-up in equities.


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Comments (Showing latest 4 of 5) View All Comments
Ashraf Laidi
London, UK
Posts: 0
5 years ago
Apr 15, 2013 0:27
In reply to Elliott Trader's post
Hi Elliot,

The US has no longer any case to criticize Beijing over an undervalued yuan because the yuan has in fact hit new highs vs the USD and even the IMF acknowledged that yuan is no longer undervalued.

As for JPY, the US has cannot criticize the Bank of Japan for doing exactly what the Fed is doing.

As my Premium subscribers were told on Friday,Japan will make a few statements ahead of G20 meeting indicating that it is closely watching current movements in order to avoid G20 from criticizing Tokyo over yen weakness.

Such remarks will lift the yen a bit and bring all yen crosses down to an attractive territory to buy them anew.

All the levels are in the latest Premium Insights

Elliott Trader
Riyadh, Saudi Arabia
Posts: 0
5 years ago
Apr 13, 2013 14:14
First of all I would to Congrat your opinion regarding $1400 levels for Gold , which surprized most of Financial Analyst Expert weeks ago.

Regarding the JPY I would like to give yoru imputs in spot of last U.S. Treasury report notes in the hereudner link http://uk.reuters.com/article/2013/04/12/uk-usa-treasury-currency-idUKBRE93B12C20130412

is JPY wills sustain for another billions for supporting Yen down .. and is it kind of balancing (Deflation/inflation)or it is matter of trade balance??

moreover, Is Yuan an mirror of Yen policy ?

Ashraf Laidi
London, UK
Posts: 0
5 years ago
Dec 19, 2012 12:38
In reply to Saka's post

Congrats on the trade. Great stuff

Posts: 29
6 years ago
Dec 17, 2012 3:31
dear, Laidi

I have longed UJ from 79.5 and still hold this position. I think this trend will be stalled at 85.5 level in short term. . But from monthly chart, I think a sHs bottom pattern has formed, and it will get to 95 level in sereval years. From fundermental view, I think this is the top of Yen, and a new era has emerged.