We’ve flagged the importance of yen weakness for global asset prices on multiple occasions in 2013. The Bank of Japan’s QE program (about $70 billion per month) is much larger than the Federal Reserve ($85 billion per month) relative to the size of the Japanese economy ($5 trillion in annual GDP) vs. the U.S. economy ($17 trillion annual GDP).
Moreover, the BoJ’s QE has only been around for a year, in contrast to the Fed’s QE, which has been off and on for five years now. The USD/JPY currency cross has moved from below 80 last November to above 100 today, a historic move for the second most traded cross in the world (after EUR/USD).
The USD/JPY last month broke higher out of the wedge pattern we (and many others) identified about 2 months ago in this CotD post. The cross held the 200 day moving average after several tests, and has been a one way train higher since November 8th:
The overnight high in the cross was 103.38, quite close to the May 22nd high of 103.74, before USD/JPY reversed this morning, and now is trading 102.70. The high in the USD/JPY also marked an intermediate high in both the Nikkei and the S&P 500 (the 2 global leaders this year) in May of 2013. The Nikkei got within 200 points of its May high of 15,942 today, while the S&P 500 is now well above its May high of 1687.
All macro traders are closely watching the cross near that May high of 103.74. One of my favorite traders to watch on macro moves is Erik Swarts of the Market Anthropology blog. His post yesterday outlined the extreme speculative positioning in short yen/long Nikkei. While the whole post is worth a read, here is his assessment of the currency pair:
With non-commercial speculators short the yen spiking to a fresh six year high last week, commercial traders have built their largest long position since June of 2007. Generally speaking, while day traders may win a few nice rounds at the table, the house typically get’s it all back and then some.
Our Quantitative Cocktails concept was predicated on the perception of the governments ability to influence risk appetites through their respective currencies. The yen will need to make a new leg lower here for this cocktail to continue imbibing participants risk appetites higher. All things considered and now similar to the dollar in 2011 – we expect the yen to complete a test of the May low and reverse sharply higher.