Eight points about yesterday's post

1) Rudeness sells! In what may be a sad commentary on human nature, yesterday’s deliberately provocative title coincided with a record number of page hits in the short history of the Macro Man blog. The correlation between impoliteness and eyeballs may well explain Dr. Roubini’s, shall we say, combative style.

2) Yes, yesterday's effort was posted on the RGE website soon after it was published, though not by Macro Man.

3) Brad Setser at RGE seems like an open-minded and civil fellow, and addressed the substance rather than the style of yesterday’s post. So please ignore all allusions in yesterday's post to anyone at RGE except its proprietor.

4) Yesterday's post was not written out of any sense of 'sour grapes' vis-à-vis last Friday's (to date underwater) USD/JPY purchase. That trade is on page 1 of its history, and any loss incurred in advance ofG7 is frankly the cost of doing business.

5) In any event, the point of yesterday's piece was to refute that the argument that the yen is a substantial financial risk, not to dispute the right of Roubini or anyone else from arguing to the contrary.

6) Amusingly, Macro Man saw another "enough already with the yen carry trade is the pathway to disaster" piece, written a couple of hours after his piece was published. Interestingly, this second piece was penned by someone long yen.

7) Macro Man has yet to hear any worrying about another pernicious trade- the sterling carry trade! If you think the yen at 20 year REER lows is worrisome, then golly, you must really be beside yourself at sterling, which is at a post-Bretton Woods REER high.

8) The end of yesterday's post indicated two possible scenarios for a substantial and lasting shakeout of yen shorts, including one that would make Macro Man happy to be limit-long yen (or close enough.) At the end of the day, Macro Man is paid to make money. Dogmatism and profitability are companions not often glimpsed in each other's company, and it is foolish to maintain positions when underlying circumstances change. Macro Man certainly has no intention of doing so. By the same token, it is neither foolish nor immoral to position one's portfolio in a manner that one deems most likely to meet one's investment targets, whatever they may be at any particular time. Indeed, it would certainly be foolish and, depending on the circumstances, possibly immoral to do anything else.

RGE’s Brad Setser responded to a few points made in yesterday’s post. Re: Japan’s trade balance, he posted the following:

Re: Why isn't Japan's trade surplus bigger --

a) lags -- yen wasn't so weak not so long ago (04). watch 07

b) oil

c) yen is only weak v. rest of the g-3. it isn't obviously weak v. the yuan

d) don't forget about japan's exploding income surplus

Addressing these in turn:

a) By the same token, USD/JPY was exactly where it is now in July 2003. In any event, the exchange rate and the trade balance have a symbiotic relationship that reflexively act upon each other. One could argue that given the current level of Japan’s trade surplus, USD/JPY should be at 125 if not higher.

b) The US petroleum deficit has stabilized, so it is unclear why the same shouldn’t hold for Japan. In any event, the oil issue is a key one for Japan: the run-up over the past several years has been a clear negative terms of trade shock, which exerts a negative influence on the yen. Indeed, in discussing who is selling all those yen, not enough attention is paid to Japanese importers, many of whom have seen cheap hedges (via barrier options) disappear, thus forcing them to go to market at recent elevated levels. These will be forced to chase USD/JPY through 125, should it trade there.

c) On a broad-based nominal TWI, the yen is at its weakest level since 1998. And while the yen may not be particularly cheap against the CNY, try telling the Koreans that it ain’t cheap against the won! In any event, the real mispricing is not so much the yen, but the euro, sterling, the Aussie dollar, kiwi, etc.

d) The income surplus is obviously captured in the current account rather than the trade account. Roughly 1/3 of the income surplus is earned by the MOF via its FX reserves, which generally are rolled over. Obviously, the private sector’s share of income receipts should rise over time as outward investment continues. However, it is unlikely in the near term that that portion of income which is repatriated will overwhelm the sheer volume of new capital that is leaving the country.

With regards to positioning, Macro Man remains very comfortable with his view that global real money bond and equity managers are, on aggregate, overweight yen relative to benchmarks, which marks a distinct and important change relative to past episodes of yen weakness. While hedge funds are almost certainly short yen, Macro Man’s inquiries continue to suggest that these positions are not extreme relative to 1998.

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Click here for comments
February 6, 2007 at 11:50 AM ×

Cassandra is typical of many yen bulls i.e. always predicting doom and gloom 1998 style. I would guess the username was chosen on purpose.


It seems to me that contrarianism is rife in the FX market. Everyone is guessing and counter-guessing each other. Its ironic that market players bemoan the lack of trends in currencies yet try to fade the one consistent trend out there (yen weakness). I find it fascinating that the same people who refuse to buy USD/BRL calls because of the risk reversal and forward points are the same people who seem to have no problem buying USD/JPY puts despite the risk reversal and the forward points. Similarly when yen volatility came lower they all shouted that we should be buying yen calls. WRONG. This is when you load up on yen puts because for the first time in ages yen vol is unlikely to go much lower if the yen sells off. Indeed vol might actually go slightly higher.

1) Of course the European politicians will make noise about yen weakness ahead of G7 and say that it will be discussed at the meeting. Its political game play to keep their voters happy. But this is how I imagine the conversation at G7 will go. Europeans: "we are unhappy about yen weakness". Japanese: "So?" Americans: "Whatever!". Hence I would be surprised if they could make a joint statement about yen weakness.
2) The Japanese are terrified of hiking rates too early and snuffing out their economic recovery. Why on earth would they trigger a sharp appreciation in the yen?
3) The Japanese haven't intervened to sell yen in a few years. The yen is this weak on its own.
4) Market corrections rarely occur when the majority of people are anticipating them
5) Whilst I appreciate that the longer a trend is in place the bigger the potential correction/reversal will be. Strong trends do not end until every last disbeliever gives up and there are way too many disbelievers (see previous point)
6) Why do I rarely hear yen bears talking people into their trade but constantly hear yen bulls talking their book?

With volatility this low its rude not to own yen puts. Why have cash positions and be constantly talked out of them by the Cassandras?

Macro Man
February 6, 2007 at 1:06 PM ×

As you can imagine, I concur with most of what you have said here.

The beauty of being a Cassandra is that her forecasts are not, by definition, believed by the ignorant masses. As such it is impossible to disprove a Cassandra's forecasts of doom ex-ante.

A more appropriate epithet for commentators of this nature is 'financial Calvinists,' who ascribe a degree of seeming immorality to market positions with which they disagree.

And like their 16th century namesake, most appear to brook no dissent from 'heretics.'

Whenever someone calls you a 'greedy fool' or similar on the basis of an investment position, you can probably rest assured that he/she is a financial Calvinist.

February 6, 2007 at 4:08 PM ×

the Yen is overvalued

the economy is weakening and the debt is rising

February 6, 2007 at 4:11 PM ×

the Yen will rally on Friday and Monday after Euro officials complain about its strength

and then , we will all short it some more

the problem is not the Yen per se , it's the Euro which is extremely overvalued.... the ECB will be on hold for the rest of the year as economic figures report weaker than expectations

February 7, 2007 at 11:19 AM ×

While you guys are shorting the Yen as a currency, I'm delighted with the weak yen and buying equities on Nikei. Talk about good news/bad news. They weaker the yen the higher exports will go, and the more profit Japanese companies will make.

I'd be a lot more "Calvinist" about the Yen if I knew the govt of Japan were intervening to suppress the Yen, but hardly see how they can raise rates until there's positive inflation in the economy.

Funny, but the true "Calvinists" are the Japanese consumers who produce more than they consume and maintain a rigid frugality.


February 7, 2007 at 2:49 PM ×

we're shorting the Yen and buying Japanese stocks Old Vet

you can do both by the way ... hello Old Vet ..... hello

February 7, 2007 at 4:19 PM ×

I'm too dumb to do both. Or, I don't do commodity trading since I lost my shirt in Sugar in 1972. Or, what little cash I risk likes to go long no matter what I try to do.

:) Take your pick. OldVet