Yen Appreciation Becoming Less Attractive and Less Sensible; Looking to Fade

FUNDYS

Indeed, the big story overnight has been the renewed buying of Yen to fresh multi-year highs against the US Dollar and Euro. The primary driver of the price action has been a combination of a risk averse market environment and comments from PM Kan and FinMin Noda which failed to mention the willingness to take any decisive action despite the latest appreciation in the Yen. Although the Japanese officials have expressed concern, these concerns have not been strong enough to dissuade Yen bulls from adding to long positions.

Relative Performance Versus USD Tuesday (As of 12:00GMT)

1. YEN+1.07%
2. SWISSIE-0.14%
3. EURO-0.39%
4. KIWI-0.65%
5. STERLING-0.76%
6. CAD-0.97%
7. AUSSIE-0.98%

In our opinion, the move is nevertheless quite overdone at current levels, and we like the idea of looking to establish a meaningful long position in Usd/Jpy at some point in the near future (see “Trade of the Day” below), with any additional declines in the rate likely to finally trigger some form of real intervention from the Bank of Japan. Even in the absence of intervention, the latest move is technically exhausted and at minimum, warrants some form of USD corrective relief.

The lure of the Yen from a deleveraging standpoint is much less convincing than it once was back when Eur/Jpy was trading by 120.00 and even 130.00 several weeks back, and we need to remind ourselves that with most of the deleveraging process behind us (assume this is true), what is really left to drive the Yen higher and Usd/Jpy lower? The idea that the Yen is a safe haven currency is somewhat laughable given the deflationary conditions and current state of the Japanese economy, and we do not believe that there should be additional interest in the single currency at current levels on demand for safe haven assets. In fact, we believe the opposite to be true, with the Yen at severe risk for a major depreciation in light of the strain the currency is having on the local economy.

It is however worth outlining some of the main reasons that the Bank of Japan has failed to intervene to this point. We will refer to a piece written by a colleague who is the chief G10 strategist at a major bank. 1) Congress is focused on trade issues in an election year and therefore any action could be a political nightmare. 2) The general idea of intervention is not viewed as a respectable form of monetary policy, and sets a bad precedent for other countries looking to manage their own currencies. 3) Recent efforts by the SNB to intervene in the Franc proved to be highly costly and in the end negligible.

However, despite all of these compelling reasons, we still believe that the Yen will undergo some major selling over the near-term whether it is through the use of intervention or not. Perhaps the BOJ realizes that the currency is less attractive in a negative carry environment as it once was and feels that the markets will come to this realization on their own without the need for formal intervention. Or, perhaps the BOJ is indeed waiting to step in but has a better understanding for market moves and technical studies than its Swiss counterpart. The BOJ could be waiting for market exhaustion (ie Usd/Yen highly oversold) before it finally comes in, knowing that buying USDs at that point will almost certainly guarantee a rapid depreciation in the Yen as even Yen bullswill be looking to head for the exits at that point. We believe that other central banks have failed in their timing of intervention on a simple lack of appreciation for technical studies, and as a result, have failed to use this untraditional monetary policy tool effectively.

Elsewhere, the general tone of the markets has not been risk supportive and we have seen a number of comments from various central bankers and economists that have not helped to bolster risk appetite. BOE Weale has said that the UK economy risks sliding back into a recession and that current forecasts for growth are overstated, while famed economist Joseph Stiglitz has said that the banking sector remains vulnerable and that more banks would be bankrupted if assets were really marked to market. Meanwhile, data released overnight was in line to slightly weaker on the whole, with German GDP coming in as expected, UK BBA loans slightly softer, and Eurozone industrial new orders mixed.

Looking ahead, Canada retail sales (0.4% expected) is due at 12:30GMT, followed by US existing home sales (4.65M expected) and Richmond Fed manufacturing (8 expected) at 14:00GMT. On the official circuit, Fed Evans is slated to speak at 12:45GMT. US equity futures are tracking well lower on the day, while oil and gold are also showing notable weakness.

GRAPHIC REWIND

TECHS

EUR/USD: Friday’s drop below 1.2730 confirms a fresh lower top now in place by 1.2925 and opens the next downside extension towards the 1.2500 area over the coming sessions. Overall there is room for continued weakness ahead, and our outlook would only be compromised with a break back above 1.2925. In the interim, look for any intraday rallies to be well capped ahead of 1.2750.

USD/JPY:(See below).

GBP/USD:The market has finally broken down convincingly through the 200-Day SMA by 1.5500 to likely open a fresh downside extension back towards 1.5000 over the coming days. The latest declines have stalled out thus far by the 50-Day SMA, but look for this moving average to be taken out as well, with the next key support eyed by the 100-Day SMA by 1.5100. Any intraday day rallies are now expected to be well capped ahead of precious support now turned resistance at 1.5500.

USD/CHF: Has managed to break to yet another multi-week low below 1.0300 to now potentially open a fresh downside extension towards the yearly lows from January by 1.0130 over the coming sessions. However, at this point, it is still too difficult to call, and with medium-term studies looking stretched, we would be more inclined to be looking for opportunities to buy rather than sell. The market has still managed to hold above 1.0300 on a close basis and the recent multi-week range is more or less intact with the market just as easily seen bouncing sharply back towards 1.0600. Monday’s bullish price action helps to confirm basing prospects.

FLOWS

A Russian account and Middle Eastern name selling large amounts in Cable, semi-offical European and Middle East demand in Eur/Usd. UK Clearer selling in Eur/Jpy and Japanese accounts on the offer in Gbp/Jpy.

TRADE OF THE DAY

Usd/Jpy: The market has dropped to yet another fresh multi-year low on Tuesday, with setbacks extending below 84.00 thus far and potentially threatening a drop towards 83.00. However, daily studies are starting to look stretched and with the market having already exceeded its daily average true range, we like the idea of buying the current dip below 84.00. Cyclical studies warn of the formation of a major bottom at current levels, and we are looking for opportunities to build a meaningful long position. As such, any drops from here on will be used as an opportunity to look to establish a playable counter-trend long, with the hopes that it could evolve into a more significant core position. POSITION: LONG @83.80 FOR AN OPEN OBJECTIVE; STOP 82.80.

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Written by Joel Kruger, Technical Currency Strategist for DailyFX.com

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