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Nic Lenoir Macro Update: Bearish On Japan And The Yen

Tyler Durden's picture




 

From Nic Lenoir of ICAP

Good morning,

Apologies for the silence on Thursday and Friday as I was travelling. It looks like for once my timing is not so poor to return. My S&P 60-minute chart indicates that we very possibly completed a bearish impulse from our sell level at 1,126. I now expect a bounce that will need to be sold as the next leg down should better faster stronger. We have 1,103.50 as the 61.8%, 1,096 the 50% retracement, and the top of the gap at 1,108. A daily close above 1,108 should be the stop for shorts initiated at 1,126, but I would recommend lightening positions here to sell again between 1,095 and 1,105.

A quick look at AUDUSD on the 180-minute indicated that there too we seem to have completed a full bearish impulse and are witnessing a bounce before the next bearish wave. AUD having been a good proxy for risk it is a good confirmation for our S&P observations.

On a separate note, I am intrigued by USDJPY and the Nikkei here. Traditionally JPY always trade strong when equities are weak. However, the Nikkei never really recovered during the bounce from 1,003 to 1,127 in S&P futures and has instead been consolidating around support it looks. I would have been a lot more comfortable selling a bounce around 10,700 than playing a break of the support here. What is all the more odd is that I see some strong bullish divergence for USDJPY on the Monthly and 180-minute chart. A bullish USDJPY is clearly at odds with a break in equities. Given that I remain bearish long term on equities and even medium term as this bounce to 1,095/1,105 should be short lived, I am struggling a bit with this observation.

To further investigate, I plotted the Nikkei's value in USD. The result is for sure bearish: the last two big up cycle peaked at 61.8% retracement of the previous bear market, and we just tested the 200-week moving average while forming a potential head and shoulder. My conclusion is that the only possible way for the Nikkei to appreciate (in JPY terms, as quoted) and the Nikkei to depreciate in USD terms is for USDJPY to appreciate. People have been talking a lot recently about the BOJ possibly stepping up in the market to stop the JPY appreciation but it is believed and they have hinted that these levels are not necessarily a concern for them yet. However GDP data disappointed quite a bit, and this could be the boost in terms of public opinion and political capital for intervention. Whether it is by buying calls on Nikkei or buying USDJPY between 85.00 and 85.40 with a stop on a daily close below 83.50, I think this is a great opportunity especially for traders who are already short US/European equities and/or short AUD and emerging currencies. A breakdown of this USDJPY / S&P correlation would be very interesting. USDJPY also trade in line with 10Y US yields traditionally, and they on the other hand keep dropping like a stone. Something has to give here and personally I believe it could well be the JPY. I feel better about this call since everyone I floated the idea to seemed to think I am crazy. Usually contrarian trades have a way to come to fruition when no one thinks they will. I would keep an eye on the 10Y Japan CDS as well for confirmation. To me it looks like Japan is about to make a move in the race to the bottom.

Good luck trading,

Nic

 

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Mon, 08/16/2010 - 11:43 | 523852 MrTrader
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BoJ will and must act decively.

Mon, 08/16/2010 - 11:47 | 523864 Ivanovich
Ivanovich's picture

Yes.  And perhaps they should call the SNB to get pointers on how to intervene effectively.  Oh, wait...whoops.

Tue, 08/17/2010 - 02:35 | 525475 teaddy bearish
teaddy bearish's picture

hey dont diss my central bank , they are just busy eating chocolate

Mon, 08/16/2010 - 20:50 | 525100 TheWord
TheWord's picture

Looks to me like Mrs Watanabe is bringing her money home.  When she does that, she doesn't stash it in the stockmarket (at least, not right away), she plonks it into her Japan Post Bank account.

It's only when the inflows are hot money speculative flows that the Nikkei follows Yen appreciation.

 

Mon, 08/16/2010 - 11:49 | 523869 Miles Kendig
Miles Kendig's picture

Hellva call Nic. If the JPY does break 83.5 then I suspect the old 79 print will fall shortly thereafter while the 10y runs to 2.25 and beyond and the JPY gets its turn as the leading crutch in the race to Zero.zero.zero.zero.zero.one

Mon, 08/16/2010 - 13:01 | 524065 TooBearish
TooBearish's picture

+1 yup

Mon, 08/16/2010 - 16:45 | 524670 Abiggs
Abiggs's picture

Acting on Nic's calls may be hazardous to your hwealth. I personally have more conviction in GS's recent currency and rates analysis.

Go ahead and extend the duration of your travels Nic, your apologies are sincerely unnecessary... 

Mon, 08/16/2010 - 11:50 | 523870 RobotTrader
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U.S. Index Futures

Mon, 08/16/2010 - 12:29 | 523966 Oh regional Indian
Oh regional Indian's picture

Sending us a message with that Croc RT? Quite the shift from your earlier...ummm...you know.

Something is afoot!

Mon, 08/16/2010 - 11:55 | 523877 surfsup
surfsup's picture

USDJPY at areas not seen since Nov 2009 and 1994...  Odds favor a bounce...

Mon, 08/16/2010 - 12:06 | 523907 doolittlegeorge
doolittlegeorge's picture

by rights, logic and math it should.  we shall see.  governments of course have an interest in making other governments "seem good" when it comes to economic policy.

Mon, 08/16/2010 - 13:34 | 524130 RoRoTrader
RoRoTrader's picture

Always read yoru work Nic. Not that I pretend to be in your league but have wondered about that significant support level around 9100/9000 for the Nikki and thinking the Nikki is starting to look more like a leader down as opposed to a follower (of the S&P).

Another point worth making here is the Yen and have wondered about that too with all of the talk about BOJ intervention at 85. And, wondered about why China has been buying JGBs........diversification out of the dollar maybe, but maybe not?

Then on Aug 11, Sakikibara, Japan's former FM comes with the,"Japan can't stem currency's rise as US economy falters." implying a rise to 80 against the USD.

Matt Carniol has an interesting take on why the Yen is rising and China is involved directly as according to Carniol the Yen has apppreciated against the Yuan already this year by 7.5%. Also, it is in China's interest to see the Yen rise as it makes Japan's exports less competitive as an exporter as compared to China.

The link to Carniol's post is here;

http://www.fxinstructor.com/blog/china-manipulates-itself-into-world-num...

http://www.fxinstructor.com/blog/author/mcarniol

Mon, 08/16/2010 - 17:48 | 524773 Lux Fiat
Lux Fiat's picture

 it is in China's interest to see the Yen rise as it makes Japan's exports less competitive as an exporter as compared to China

 

Interesting viewpoint and article.  Thanks for sharing.

Mon, 08/16/2010 - 13:45 | 524194 AxiosAdv
AxiosAdv's picture

Anyone have a current take from Hugh Hendry on the Yen?  He nailed this trade about 6wks ago.

Mon, 08/16/2010 - 14:03 | 524212 AxiosAdv
AxiosAdv's picture

nm

Mon, 08/16/2010 - 15:46 | 524535 anony
anony's picture

I've been waiting for 6-18 months or more for any sign of an upward move USD/JPY, just like my TBT which is 12 points off.

I hope I live long enuff for these dogs to perform even a simple trick like, roll over.

 

Mon, 08/16/2010 - 16:40 | 524651 nevadan
nevadan's picture

"USDJPY also trade in line with 10Y US yields traditionally..."

I've been wondering about why this is.  Does anyone have any speculations on why these two track each other?"


Mon, 08/16/2010 - 16:49 | 524676 Artful_Dodger
Artful_Dodger's picture

1. Japan is trapped.

2. Their policies are good (protectionism and refusal of the free trade oxymoron), however they made the mistake of crushing worker wages for 20yrs. The yen is getting stronger and whilst this does bring down energy/overheads it doesnt matter if global consumption is low.

3. Japan can't manipulate the currency for fear of starting a backlash in the FX markets. Prior to 04 Japan could manipulate the yen via their holdings of treasuries USD. Now China has more of both..and is buying yen to strengthen it.

4. China is actually buying more 'stuff' from Japan but wishes to punish Japan for WWII crimes. Japan knows this and can't get out of it.

5. China will buy Japanese treasuries when their declining elderly population cannot any longer. They will wait until potential default before asking for complete removal of the US from Okinawa...to gain forgiveness of debts.

6. Japan is trapped. The US should watch closely as it will share a similar fate...although in a more spicey sauce.

7. The End (not of humanity...LOL....just this little bedtime story).

 

Arty.

 

 

.


 

Mon, 08/16/2010 - 20:52 | 525110 bingocat
bingocat's picture

My conclusion is that the only possible way for the Nikkei to appreciate (in JPY terms, as quoted) and the Nikkei to depreciate in USD terms is for USDJPY to appreciate.

Is that so...?  I am not sure the rest of us would have figured that one out...

</sarcasm>

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