Abenomics, deflation and the Japanese yen.
The second arrow of Abenomics created an epic money-making opportunity in the post-Bretton Wood era of floating exchange rates. The Japanese yen has fallen from 76-78 on the eve of the LDP election win in autumn 2012 to 120 now against the US dollar. The Bank of Japan has sworn to double its monetary base, achieve a two per cent inflation rate and nudge Japan out of two "lost decades" of economic quagmire. I had recommended yen hedged longs on the Nikkei Dow at 8,000 and long dollar/yen at 78 even before the 2012 general election. These two macro trade ideas were fabulously profitable in 2013 when the Nikkei Dow rose 57 per cent.
The Japanese yen is still inexpensive against the US dollar from a historical perspective. The yen's Bretton Woods peg was 360 to the dollar, and its Plaza Accord rate was 270. After the yen traded as the post-Lehman "safe haven" currency in 2009-12, Abenomics has once again led to the yen fall to its pre-financial crisis trading range as a global funding currency.
Japan has the highest public debt/GDP ratio in the world at 250 per cent and awful demographics, with the Empire of the Rising Sun the only society on earth whose adult diaper market is bigger than its baby diaper market. Fiscal stimulation and structural reforms cannot compete with yen depreciation as the antidote to Japan's deflation morass.
As the ECB engineers a free-fall in the euro and the PBOC depreciates the Chinese yuan, Japan Inc is dependent on Governor Kuroda's periodic "shock and awe" bond purchases to keep the yen bears profitable in Planet Forex. Despite shockingly soft March US payrolls, the latest FOMC minutes reinforce market consensus that the Yellen Fed will raise the overnight borrowing rate sometime in 2015. In essence, Fed hawks want Dr Yellen to ignore recent. Arctic weather related softness in the US payrolls data.
The BoJ kept its monetary policy unchanged at its April conclave. But the yen did not rise sharply against the US dollar, as in the past. However, it is doubtful if Governor Kuroda will achieve his two per cent inflation target in 2015 and Japan's economic fundamentals are both soft and deteriorating, meaning Kuroda-san will have no policy option but to expand his quantitative easing programme this summer. I expect the Japanese yen to remain in a 118-124 trading range this summer, though Abenomics and its magical second arrow will ensure the yen's bearish trend continues.
The US dollar's epic 11 per cent rise against the euro in the first quarter has continued in April. After a brief short covering rally, after the soft March payrolls report, the currency gnomes have sold to Euro to 1.0590 as I write, even though Greece made its e1/4460 million repayment on its IMF bailout loan. The US job claims data and New York Fed President Dudley's hawkish monetary policy statement has reinforced dollar strength.
The euro has plummeted four big figures from its April 6 high at 1.1035 and it is surely significant that the euro has not even failed even once break out of its 50-day moving average, a testament to the shree momentum of the King Dollar trend.
The financial markets are still nervous about the ECB's emergency liquidity assistance programme for the Greek banking system. The event risk in Troika-Athens relations has led to a spike in euro volatility. I still believe the euro will test Wim Duisenberg-era lows well below parity in the next 12 months.
The bear market rally in crude oil/metals has led to capital flows to bombed out Toronto/Vancouver equities. However, the Canadian dollar is still down seven per cent against the US dollar in the first four months of 2014. I doubt if Governor Poloz will reduce the 0.7 per cent policy rate next week.
I recommended shorting the Canadian dollar at 1.06 in this column, friends in Dubai have called me to ask if they should take profits now that the loonie has fallen to 1.25.
My view is there is still juice in the short Canada trade. Oil prices will fall again, Canadian housing prices/consumer debt are extended and relative economic underperformance with the US will continue. So the dovish Bank of Canada will lag any Fed rate hike by at least six months. I expect the loonie to fall to 1.34 by Christmas.
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|Publication:||Khaleej Times (Dubai, United Arab Emirates)|
|Date:||Apr 12, 2015|
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