A few thoughts on yen

What a difference a few miles makes.   While Washington and New York were buried under some two feet of snow, Macro Man's town (some 50 miles from NYC) got 10 inches, and a town 20 miles north got five.  Vermont, where so many locals go to ski on the weekends, got none.  Perhaps that's Nature's version of a pairs trade gone badly wrong.

In any event, the new week is here, with punters still wondering if this is still the end of the world....or the end of the sell-off.  There are a lot of charts that look the same, with price action since December resembling something of an inverted Nike swoosh.  Over the past few years markets have become accustomed to V shaped recoveries in many assets; well, other that oil, the "recovery" of which has resembled a lower-case eta.

On the face of, though, if you are of the belief that nothing's changed, current pricing still represents a nice buying opportunity.   Indeed, last week saw levels of risk aversion that are usually conducive to stepping in and taking the other side.   Macro Man's proprietary risk indicator, which he finally got around to updating over the weekend, registered a 2 standard deviation risk aversion event, which usually marks a bottom....

...well, unless it doesn't.

Still, Macro Man is operating under the thesis that markets are still functioning, even if liquidity is poor and pricing erratic, as is generally the case during episodes of risk aversion.   In other words, you can generally get a price, even if you might not like it.  (If all holders of energy high yield asked for the bid, on the other hand, that might no longer be the case.)


As such, he can kind of understand why one might wish to dip their toe in, say, USD/JPY.  Last week it tickled the lows of the past fifteen months, and while it's well off those lows now, at least you know where you're wrong:

Moreover, CTAs (proxied by the IMM) are actually long yen for the first time in forever; well, not literally forever, but at least for the first time since "Abenomics" became a thing.

Moreover, there's a BOJ meeting on Thursday, with little expected after Kuroda kind of pooh-poohed the need for more easing in Davos.  It's all upside, baby!

Well, perhaps, in the near term.   Then again, perhaps not.   Macro Man's research has long suggested the avoidance of FX carry trades as long as the risk index is negative, which it clearly still is.   Of course, a 100 points in the Spoos could happen in a couple of days and take the index back to neutral, so that reasoning isn't exactly etched in stone.

On a more structural level, there is reason to be concerned about being short yen.  Obviously a world of higher volatility naturally lends itself less freely to FX carry trades than the vol-suppressing  climate that we all "enjoyed" over the last several years.   The yen has form, as well; it strengthened nicely against the USD in the six months after the inaugural rate hikes in 1994 and 2004.

Perhaps more fundamentally, Japan's post-Fukushima trade deficit has finally closed and moved back into a tiny surplus, as reported last night.   Over many years, this has been Macro Man's favourite determinant of the trend in USD/JPY, albeit with a lag.

Granted, a lot of the improvement has come from a decline in imports, but that's just the thing; one of the reasons that the trade balance collapsed into deficit after the earthquake was because of the shift in Japan's energy profile towards the importation of fossil fuels.  The sharp decline in the oil price has represented a tremendous terms of trade boost for Japan.  Back in the old days when we cared about quaint notions like "external balances" rather than the apparently complete abdication of any factor outside of "risk on/off" and "central bank monetary policy", this would have been a big deal. 

Who knows?  Insofar as macro factors are playing an increasingly prominent role in asset price determination from China to Brazil, maybe it's time to dust off the old playbook.  As such, given the swing in trade and the general level of valuation, you can put Macro Man in the "sell on rallies camp" for USD/JPY....somewhere north of 120 would suit very nicely, thank you very much, perhaps on the back of CTA stop outs?  In the meantime, he can afford to be patient; macro factors play out over months if not years; the key is to pick a good entry level and stick it in a drawer.  Eventually, you'll open it and get a nice surprise.