This page has been archived and commenting is disabled.
Is The Market Worried About The Wrong Deficit
Submitted by Nic Lenoir Of ICAP
Finally we are starting to hear more and more chatter about short JGB trades, long USDJPY, and concerns being voiced about the Japanese deficit. It is dramatic that the US is going to end up getting from 65% to 80% debt to GDP ratio in a matter of months, but before the gold bugs and short-USD carry traders get too excited, maybe they should think whether it is indeed time to increase the use of the USD for the financing of their trading positions. Japan is flirting with 200% debt to GDP ratio. Granted the consumer in Japan has the advantage of a strong savings compared to its US counterpart. However, a ballooning debt and a shrinking population is the kind of leverage economic disaster is made of. Throughout the 90s Japan has enjoyed a strong net positive trade balance, though it hasn't really materialized in much growth. However the crisis in 2008 inverted that, and even though Japan's trade balance has made a comeback to positive since, we are still at the low end of the what was the range for the past 15 years. Meanwhile the US trade balance deficit has shrunk by half. If the G-20 intends to make good on its commitment to reduce trade imbalances, then certainly that is one advantage Japan loses over the US.
Moving on to rates, 10Y JGBs yield a mere 1.45% compared to 3.53% for 10Y US Treasuries, and the Japanese CDS is wider, so the imbedded risk free rate spread is even wider between the two. Recently JGBs have sold off, but nothing compared to US treasuries since March overall. Interestingly from a credit standpoint we see the opposite as the Japanese CDS has been widening a lot more than the US CDS, especially this past month.
As for the currency, we can see that the USDJPY has been in a wedge from 1198 to 2008. We have exited to the downside, but I think it is a case of a throwover and we are going to end up breaking out to the upside. The monthly RSI does not validate at all the recent lows made, in fact we bounced of the trend support in RSI. Part of this excess to the downside is due to excessive weakness of the USD, but also to the coincident repatriation of money in Japan as deleveraging and risk aversion struck the market last fall. It is only the unique combination of these two factors that brought us to these levels. Looking at it more closely, we see that the we had strong weekly divergence as we retested 88 in October. The sell-off from April to early October is a perfect A-B-C with C=A almost to the pip. Then the sell-off from October 26 to November 1 is perfect a-b-c correction with c=a if you exclude the slight intra-hour excess, and a retracement between 61.8% and 76.4% from the highs of the 26 (hourly chart). SO technically we have many elements indicating we could be on the verge of sharp move higher. Short-term the minimum target I see on the upside is 93.54, but I am fairly confident we will test the medium term bearish channel at 96.25. Further out there is a key resistance at 101.34 which if broken opens the way to the real big underlying macro move that I think is in the card. Macro models suggest the cross is worth closer to 120/130 than 90. Only risk is a retest around 89.29 in the very near term, but I would suggest buying between 90.15 and 89.86, and possibly add at 89.29 should we get there. only a weekly close below 88.80 would suggest that we need to wait further before entering the trade.
For traders in rates space, selling JGBs is the most sensible way to express the view. we would recommend to wait a pull back to 139, or otherwise sell on a break of 137, and add if we bypass 135 on the downside. A retest of 130.75 is quite likely, and only a bypass of that level would mean we are at serious risk of seeing a trully powerfull acceleration. I think this final case would be synonymous with a much wider Japanese CDS and severe concerns about the fiscal situation. It would also probably mean that for the first time since the 1990s the Japan retail customers lose faith and appetite earning under 1.5% no matter what other risks are out there. A break of 130.75 could well be that tipping point.
So there are three ways to play this view on Japan. Credit traders can buy the CDS, but as we see the price has doubled in a month. Rates traders can sell JGBs. The recent sell-off in the past few weeks is related to the widening in CDS, but we feel there is definitely room for further downside, either selling a bounce to 139, or a break of 137. Finally in the FX market, USDJPY remains very close to the lows in over 10 years, and if the USD woes dissipate a bit we feel this is a trade that could have a lot of upside. After all we have seen recently a plethora of large macro traders talk up the USD in the media, including Jim Rogers who is so bearish USD that he moved to Singapore. If the fact that the UUP long USD ETF ran out of shares is any indication, it might be time to focus on an other weak currency...
Good luck trading,
Nic
»
- 4826 reads
- Printer-friendly version
- Send to friend
- advertisements -
re saving rate- although historically higher than the U.S.-Japan's saving rate is now in the 2% range
And if Japan implodes, then what? if anything bullish for the cleaner balance sheets of JPY equity - that was the meme last year. The idea that a cascade of failures will somehow polish the turd is luducious
I think we're past "if Japan implodes" and on to "when Japan implodes" As a previous poster pointed out, 20 years of artificial stimulus has cured the average Japanese of the "evil" saving habit. Now the country has crossed the Rubicon. As interest compounds, there's no way out.
And exactly how is that dollar bullish? The geopolitical strokes of the Japanese are overtly edging away from dolalr block Regardless, still unclear (1) how this situation is any different from the US (outside of timing)
And of course the JPY witha 15% or so weighting in DXY is the logical soft point to stabalize the hull.
Has Eclectica come out with an update yet??
Hendry's been saying about sovereign cds plays
Starting to hear this too from well sourced people, who are buying the dollar yen cross. No wonder gold keeps going up, all the majors are screwed.
"Granted the consumer in Japan has the advantage of a strong savings compared to its US counterpart."
If the numbers I have seen are correct then up to 90% of Japan's sovereign debt is held by Japanese citizens. With a debt to gdp ratio of 200% then going on GDP #s $7.7 Trillion dollars worth of "savings" the Japanese hold is held in government bonds. Should the Japanese government default on its debt the magical savings pile that many think would save the country will vanish in direct proportion to the haircut that the Government gives bondholders.
What the hell went on with UUP at 1:50
Interesting. I sensed a disturbance in the force recently, or perhaps it was the foie gras from yesterday.
Japan pretending to die would be the final piece in the jigsaw...didn't Lord Griffiths of Fforestfach say that the yen would weaken?
R
I) Japan is the largest net creditor nation II) USA is the largest net debtor nation If Japan has fiscal problems and needs to start selling these assets, it may go badly for both countries...
Dollar bears are betting on the rate of increase of debt-to-GDP, not the exigent debt. That's why the trade could explode. It's not like the rest of the world's economies are bastions of health and per-capita joy. But a growing segment of rage-blind traders love gold, oil, their guns, and executing the financial equivalent of a two-minutes' hate on the administration.
Bernanke presses the up button and that whole Maypole unwinds. Can't wait to see their faces
Edward Harrison thinks the debt problem is exaggerated
The new Japan, domestic consumption, and the neo-liberal thought machinehttp://www.creditwritedowns.com/2009/11/the-new-japan-domestic-consumpti...
Are you people nuts? Japan is a huge net creditor nation. Any mention of default is absolutely silly.
Will Japan be able to realize their savings? Likely not all of it as they have some poor fundamentals.
Push comes to shove, they could impose capital controls, impose additional taxes, etc.
The US is a huge net debtor nation. Who is better off?
who owns japanese debt?
They own their own debt denominated in their own currency.
This doesn't answer the question. Who is they, and who does "their" refer to?
Do individual Japanese citizens hold government debt? Does the BoJ hold government debt?
See reply below...
I can't help but wonder if the US really knows its total debt exposure. Sorry, but I do not trust the FED in providing full disclosure, especially if they use their own brand of off balance sheet creative derivative accounting in collusion with their member banks. The congress and the american people do not have all the facts.
From my sources, GAO FED Audit exclusions:
(1) transactions for or with a foreign central bank, government of a foreign country, or nonprivate international financing organization;
(2) deliberations, decisions, or actions on monetary policy matters, including discount window operations, reserves of member banks, securities credit, interest on deposits, open market operations;
(3) transactions made under the direction of the Federal Open Market Committee; or
(4) a part of a discussion or communication among or between members of the Board of Governors and officers and employees of the Federal Reserve System related to items.
The exclusions are ripe for abuse. I love the use of the word transactions. In GAAP a transaction is largely an umbrella word to address accounts, or if you will, moving money around. A transaction is even more powerful given the FED can create money. The FED's brand of accounting must truly be something to behold.
As the FED, I can engage in any transaction deemed OK by the FOMC, and it cannot be audited, and the communication between members of the Federal System are also excluded as they carry out these actions. Talk about covering your tracks.
I guess in the end, I do not buy the argument that politicizing (congressional oversight) the control of the nations money is wrong. The congress as a direct representative of the people, should wield this power not the FED. The FED was never promoted as a shield against political bumbling, it is supposed to be the lender of last resort.
Mark Beck
They are ultimately Japanese citizens. The vehicle matters little to me unless they monetize it. My point is that less than 10% of JGBs are held by foreigners.
that was my point. But consider also that the half of thee US debt is intra agency - therefore selectivivly defaulting on the internal debt is tantamount to the same thing
The story suggested that Japan is perhaps in worse trouble. It seems all developed countries have to curtail their promises in some fashion. It also seems that a high net creditor nation is better off than a high net debtor nation.
Any saver entity from nation to individual needs to be concerned about the quality of their savings. In a world of excess debt and growing defaults, quality becomes increasingly difficult to come by.
Excellent Nic; love your reports & insights. Actionable info ;)
Keep 'em comin'..................