Has The Great Carry Unwind Arrived: Yen Surges After Warning USDJPY 100 Coming

For all the talk that the BOJ would unleash more stimulus, buy REITs, more ETFs (both existent or non-existent), or outright stocks, today the USDJPY did something it has not done in 7 weeks: the world's preferred carry trade currency just slumped to the lowest level since early November. If it wasn't for  the recent bounce in crude, and if the traditional USDJPY-ES correlation pair had not broken down as a result, the S&P would be well below 2000 at this moment.

One reason for this is the epic confusion delivered by the BOJ one week ago, when instead of delivering its traditional "forceful" intervention, Kuroda & Co., disappointed the market by presenting half-measures which sent the USDJPY briefly spiking only to see it plunge shortly thereafter.


But another, perhaps more troubling catalyst, was the call overnight by JPM's Tohru Sasaki, Tokyo-based head of Japan markets research, who as Bloomberg reports, warned that the USDJPY will gain 110 next year from about 121 now, the most bullish among around 60 forecasts compiled by Bloomberg. Worse, he sees the equilibrium exchange rate at "below 100."

Sasaki believes that the time to be contrarian has arrived: "What investors like to hear is that the yen is weak and stocks are up -- but if everyone’s constantly betting that way, at some point they’re going to get burned,” Sasaki, who worked at the Bank of Japan for more than a decade before joining JPMorgan in 2003, said in a Dec. 18 interview. "It’s possible that equity prices keep going up forever, because everyone is working to maximize their returns. But in the forex market, it will never happen -- there’s an up and down."

If correct, this is a big problem for the BOJ, for Japan, Inc., for Abenomics and certainly for the Nikkei, which has soared in recent years only because of the Yen's devaluation, as Japan - unlike Europe - has actually reaped the profitable benefits of export-stimulating currency debasement. Recall

This is how Albert Edwards explained this a month ago:

Japanese corporate profits since 2013 have boomed like never before. Abe hopes and prays this will spill over and spark a positive wage/price spiral. Yet, in the absence of further Japanese QE, the yen has been paddling sideways against the dollar in a ¥125-118 range since last November - and the yoy decline will soon drop away to zero. In fact, that is already the case on the BoE trade-weighted yen measure - see chart below.

Sasaki's view is quite contrarian and clashes with the consensus among analysts for the yen to slide to 125 per dollar next year, which would complete a five-year decline of 38 percent. The problem, as the recent ECB fiasco showed, is that if everyone expects the same thing, just the opposite happens.

What is more troubling for the crowd, is that Sasaki has a history of being spot on:

The yen has also become “significantly” undervalued after the BOJ’s trade-weighted index slid to an eight-year low in June, according to Sasaki. A Bloomberg gauge of consumer purchasing power parity shows the yen is 39 percent undervalued compared to the dollar, the most among major currencies.


It’s not the first time JPMorgan has gone against the grain. Sasaki’s contrarian call for the currency to rally in the first half of 2014 proved prescient. In the second half of the same year, he escalated his forecast for yen weakness following a surprise BOJ easing, predicting 120 per dollar for Sept. 30 of this year. It closed that day at 119.88.

Think Goldman or Gartman, just the opposite.

More disturbing is the BOJer's prediction that the Bank of Japan can no longer drive Yen weakness:

Many bears are counting on BOJ Governor Haruhiko Kuroda to drive weakness, after two rounds of stimulus since April 2013 helped push the currency to a 13-year low of 125.86 per dollar in June. Analysts are almost evenly split on the chances of an expansion of the quantitative and qualitative easing program. JPMorgan sees additional QQE late in 2016 having no lasting impact on the yen.

Incidentally this is precisely what we warned in early September when we presented an IMF report in which the monetary fund confirmed what we had been saying for years, namely that central banks are now monetization constrained, something which explains the BOJ's recent backtracking.

The result of all this skepticism, is that what until recently was the world's most profitable trade - long USDJPY - is rapidly losing steam: "Yen declines are slowing, with this year’s 1 percent loss just a fraction of the at-least 11 percent tumbles each year from 2012. Hedge funds are also closing bets on depreciation, slashing so-called net shorts by the most since August in the week to Dec. 15, Commodity Futures Trading Commission data show."

Sasaki's near term recommendation is for at least 5 big figures of USJPY downside. :

Sasaki expects an unwinding of bearish positions among domestic investors too, driving the yen to 115 by March 31 next year. They include the 8.5 trillion yen in bets against the yen, 10 trillion yen in overseas holdings of investment trusts and the 50 trillion yen in retained earnings at Japanese corporations that could see increased hedging, JPMorgan estimates.

Sasaki adds, that “different from past episodes of the yen carry trade, this time the major sellers of the yen are Japanese," he said, referring to a strategy where investors borrow yen cheaply to invest in higher-yielding nations. “Japanese will need to unwind those positions eventually. The yen is no longer the ideal funding currency.”

It he is correct, not only will the Nikkei plunge, but the weakness will quickly spill over the US, where Yellen herself will have no choice but to launch even more QE, in the process weakening the dollar and potentially leading to even more Yen weakness in a feedback loop.

But the main reason why we are virtually certain the right trade here is to be short the USDJPY (and thus long the Yen), is the following blurb from Goldman's FX crucifier, Robin Brooks from this past Saturday:

... the BoJ’s 2% target is a long way away, however further progress towards this goal should lead to a decline in real rates – as the nominal curve is anchored by QE – and a decline in both JPY spot and forwards (Exhibit 4). We think the BoJ is closer to easing further to attempt to achieve a successful reflation than it is to giving up altogether, and so we continue to expect $/JPY higher. We recommend being long $/JPY as part of our 2016 top trade recommendation (along with short EUR/$) and forecast $/JPY at 130 in 12 months.

Three days later, the USDJPY is 100 pips lower.

To summarize, in finance, there are many unknowns, but one thing is absolutely certain: anyone who listens to Goldman's advice to clients, ends up looking like this.