Banker Catfight: It's On!
From Nic Lenoir of ICAP
Well, hopefully those who were long USDJPY did not close after the results of the election in Japan yesterday. After staying away from currency intervention and being campaigned against on that very basis, Kan did not wait 24 hours to turn around and start selling USDJPY! Other than the obvious irony of the turn of events, this move has HUGE consequences.
Let's turn the clocks back a couple years: in the fall of 2008 all the central banks were united fighting the credit crunch "come out of nowhere" trying to prevent a systemic collapse. Because obviously no one seems to have put much thought into why the system nearly collapsed, it wasn't long after disaster was barely (temporarily only) averted that central banks and politicians went right back to what they do best: a healthy dose of populism. Because somehow it did set in at each individual country level that growing one's middle class to generate economic growth without an explosion in lending is actually difficult, it wasn't long before the logical conclusion was reached: let's grow exports! Something that by the way has long been understood by China which has made no attempt at growing its middle class, focusing purely on currency fix and cheap labor.
Where do we go from now? Well the intellectual midget fight is on. The BOJ asked the US and Europe for support in case of intervention and both basically looked away like the prom queen when the class geek asks her for a dance. At the end of the day though, a ninja's got to do what a ninja's got to do and the BOJ moved ahead with currency intervention. The ECB can't be too pleased with that, especially the Germans who after 8 years of EUR appreciation were finally starting to reap the benefits from teaming up with economic misfits. With the Fed reinvesting interest payments in fresh treasuries and Q2 rumors, and now the BOJ in currency intervention mode, the clouds are gathering over export prospects for Europeans. The next logical step will be trade wars. When one hears US senators campaign against the Yuan manipulation it's a miracle we haven't seen more of it yet.
Market wise the implications are very interesting for the USDJPY Vs. UST-JGB spread. On one hand the BPJ is buying the USD and selling JPY, on the other the Fed is buying treasuries sending the UST-JGB yield spread lower... Grab some popcorn and a soda this one is just getting started. Ultimately the relationship will break, and I think the move to sell US Treasuries based on the BOJ intervention is ill-advised. The 10Y Treasury future hit channel resistance yesterday and could possibly consolidate with support below at 123-26 and quite a bit of upside once we bypass yesterday's highs.
For USDJPY we have recommended buying over the pat two weeks and I am glad my decision was based on technical/positioning considerations and not purely expectations of a switch of PM at the ellection as clearly it would have forced me to change my outlook yesterday! The Daily chart is self-explanatory as we had not only strong bullish divergence and a major support around 82.90 yesterday. This kind of price action is rarely ignored by the market and the magnitude of the bounce is as much a result of the news as it is a function of the market positioning going into it. Short-term we have hit the 50-dma which is the logical resistance for today's move. People looking to buy would be better off waiting for a pull-back towards 84.50, and we would not really change our expectation for further USDJPY strength unless 83.50 is bypassed on a daily close. Next key resistance once the 50-dma is bypassed is 87.90/88. If that is bypassed it would invalidate the bearish impulse started around 95.00 last May and would in my opinion imply that the bear market for USDJPY started in the 70s could be over... Let that sink in for a second and try to guess how high I think USDJPY can go.
Good luck trading,