Guest Post: Is The Yen A Proxy For Yuan (rmb) Devaluation Or Carry Trade Déjà Vu?

Submitted by Yves Lamoureux of Blackmont Capital

I have been bullish on the Japanese currency since March 2007. What I think defines broad movement in currencies is perception along with broad relative monetary actions. The expansion or contraction of monetary aggregates in one currency versus another is in essence its purest denominator.

We show today such a timing model in the yen/usd rate of exchange. Notice that timing simply based on monetary aggregates can be not forgiving for quite some time until the new trend establishes itself.

The top chart is of the yen itself. The bottom chart shows the expansion or contraction of the broad money base. It does generate great warnings ahead.

I have changed the color to purple for the expansion or rise of monetary aggregates. It will be useful to make our present case more obvious.

I congratulate Albert Edwards on beating me to the punch for the yuan devaluation thesis. I too have been expecting this for over a year. Bringing it up now was however too early for me. I believe that the yen might bear  the brunt of the devaluation first as the Chinese currency does not float readily.

The present USD carry trade is the equivalent version of the yen carry trade on steroids plus more. There is no doubt that zillions of derivatives have major multiplication effects. The real fun part begins when you want to unwind this.

The parallels are eerie just as then Japanese held in contempt their own currency. They could not sell it fast enough to buy high yielders. Just as then, they would face  an end-game. This is where we did an excellent purchase of yen  in combining sentiment and broad money timing, giving us a green light.

It would appear  that we are starting to get the same elements but in reverse. Sentiment on the yen is sky high and broad money is acting up.The chart on the right hand side shows the last purple arrow moving up. It would therefore be my expectation of a top in the Japanese yen. Yet to be defined  is the nature of the correction. Does it portend to an upcoming devaluation of the yuan ?

A direct benefit of a weakening yen is again long treasuries. Our Japanese friends turned sellers of bonds  would quickly revert to becoming buyers again.

I study one market at a time on its own merits. But perhaps this unlikely trigger might offer the delicate carry trade too much destabilization…

Yves Lamoureux, Investment Advisor, Blackmont capital inc

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