The future Japan is heading towards doesn’t look either hot or bright. Still… everyone’s talking about how much the market is rallying off the election expectations for Abe injecting new oxygen into the flames of inflation, presumably to drive the Japanese Government Bond Train ever faster into the wall of steep yields. Cheery, isn’t it?
But hold on a minute, how much is the market really rallying?
Yes, the 9 230 level indicated was broken today as the yen plummeted ever further. Still, so far so gentle in terms of the rally magnitude. However, the significance of this rally is not necessarily in the magnitude, but in the speed. The three-day momentum clocked in at the highest level in more than two years if the “post-Tohoku Earthquake currency intervention combined with mean-reversal” rally is discounted. Now, today the market closed right below the upper level of the indicated channel in the chart. So, low volumes tomorrow can pretty much be guaranteed, and anyone daring to dip their toes in the Asian market on Monday either is a politician dumb enough to think they know the game, or that they’ll get away with trading Euro finmin insider information. My bet? Implied volatility goes up, and the limit orders sitting around the 9 430 channel line will not move until Tuesday. Epic reversal or epic break? Epic either way, so saddle up and ready your straddles!
Again, the driver of this is of course the anti-yen policy from Abe (which got smacked down pretty hard by Shirakawa, but there’s only one direction one can trade at a time, remember) which is much more spectacular. One would presume that the trade deficit and corporate downgrades have done their part to temper the equity rally, but the effect is rather stunning when compared to the yen as can be seen below:
USD/JPY rate, more than matched in the EUR/JPY rate as well. What happened to the Bollinger Bands??
Massive momentum on the 6-day period, meaning that this move is much, much more sustained by the currency markets. Remember, the yen fell by 0.75 percent today as well, this chart is from yesterday. This could indicate that Mrs. Watanabe and Corporate Kenichi are selling yen as soon as they can for just playing the deposits appreciation game or for acquiring foreign assets while their yen are not quite done being burned through in the inflation-fire-feeding game Abe is playing. On the “positive” side, we’re at the level some companies thinks useful for actually making a profit, so those of you doing psychological trading, join the Nikkei rally now!
In the longer perspective this of course looks somewhat less clear:
USD/JPY, monthly candles for the last 16 years
Of course we are getting good rejections off the 1-year EMA and the related B-band is bending away from a ridiculously tight level. The three-year BB equivalent is of course consolidating and coming in to make a pinch, which could cause severe expansion if the trend were to bend the 3-year SMA in a yen-bearish direction. Meanwhile the absolute magnitude isn’t that big, and the upper BB as well as the 3-year EMA is coming down like synchronized swimmers on this chart. Still, it’s “in-trend stir” and I will not pay a huge amount of attention to it until I see an upper-80’s value post-election allowing me to discard the ADX/DMI possibility of a “weave” which was very much in play the last time I commented on the long term prospects of this pair.
Then again, return to the “Seasonality” discussion in that post, and I will estimate that an acquisition of USD’s on New Year’s Day with a short call option relative yen at 98 to the dollar on April fools and a long call of 110 on the same date and pairs direction is most likely the play to go for given the 100-110 price action reversals between 1994 and 2009! Get out at 100 no matter what, day trade the range and take a very cautious approach until 120. I do believe that analysis of that situation is better suited for shorter term, but a year-end call on the USD at 120 doesn’t look nearly as bad technically as it does fundamentally…
And that’s the crux of this pair, because I fundamentally believe, no matter what anyone says, that Japan can function in default while the US can’t. We know what we are dealing with here, but the huge fiscal gap of unfunded liabilities in the US is so horribly entrenched into their law that even default won’t rid them of their problems, and that is where I see Japan having a better deal. A sweet, if cold, treat on a silent night, accompanied with a view of clear skies and a willing partner in trade (China) if nothing else after their pension entitlements and creaking old banks have been blown away and broken, respectively.