YEN at extremes

[rffrydr]

120 has been respected in the face of record shorts. Russia announces diversification of reserves to yen today.

http://today.reuters.co.uk/news/articleinvesting.aspx?type=economicIndicatorsNews&storyID=2006-10-16T125510Z_01_L16563659_RTRIDST_0_MARKETS-GLOBAL-WRAPUP-4.XML&WTmodLoc=Business-C5-Economics-2

And any rate-hike before March would be a surprise at this point. This has been the rally that wouldn''t stop dying. But I wouldn't sell it short.
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Today is the Tomorrow you worried about Yesterday!

[HenryTo]

Euro/Yen got away from us this morning and is now even further away as we speak.

The Yen's strength tonight is getting me a little bit worried - although I don't think U.S. equities have made a top just yet. Will reevaluate this weekend.

[rffrydr]

I agree, a deflationary bust will be the time--a time maybe closer than we think. For the immediate term though BOJ will use this boom in a desperate try to at least maintain the semblance of a normal rate structure. .25% for six months still "says" deflation and that's not the message. Summer brings elections--they'll make their own window of opportunity.

Yes, the carry is too big to bet against now but the the short rate (euro)yen deposits are off their lows and the JGBs have contributed to a serious correction in our bond market--and perhaps is a force behind our subprime fallout here in the last month. Deflationary booms will top financials: Moody's, that bellweather of credit derivative risk is only back stalled at May highs and many of the financials have been similarly slowed (with all MnA). There's still plenty of room for pain on a move to 2% JGB.

Bethatasitmay Japan hasn't yet failed to disappoint--but it's stats are notoriously unreliable and the anecdotes and price behaviour this last couple of weeks may have a short-covering surprise in store for us.

Europe invented the "platform"--it's called "Ikea."

Euro holding strong in face of VAT with Gld looking to upleg. The boom will maintain this "marginal producer" and maybe we'll have to take one more leg up.

Anyway gotta have something to do while busy by-and-holding.
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Today is the Tomorrow you worried about Yesterday!

[HenryTo]

No loud noises to take down the Yen vs. the Euro just yet. I believe the Euro bull market against the U.S. Dollar is over as we shift from an inflationary to a deflationary boom - but it is probably not over against the Yen just yet.

In an inflationary boom, the best assets to invest in is so-called "hard currencies," commodities, and very cyclical industries such as manufacturing, agricultural industries, and mining companies. This is especially true in Europe - where rigid labor policies have made wages very sticky on the downside and where automation is not as valued as in the US or Asia. As a result, the Euro benefited in a significant way, especially given the French love of gold.

In a deflationary boom, the best assets to own is technology, retail stocks, financial services, and GaveKal "platform" companies such as Dell, Apple, Wal-Mart, etc. Most of these investments are located in the United States. On the other hand, the worst assets to own are commodities, mining companies, and high-cost manufacturers - which brings us back to Europe. Despite some reforms in Germany over the last 12 to 18 months, both the labor system and its system for automation and cost reductions in general are very rigid. This applies to most of the Euro Zone. In a deflationary boom, there is usually a glut of manufacturing capacity. Basic economics dictates that companies will now have an option to pick their manufacturers - and most likely, they will now pick manufacturers from China, Vietnam, Japan (given the record low Yen against the Euro), and possibly even the United States - rather than Western Europe (or Great Britain for that matter).

This sets the stage for a bull market rally in the U.S. Dollar vs. the Euro (other factors which I have described in our commentaries notwithstanding).

In such a scenario, however, the carry trade and the case for a continued global diversification by Japanese investors and pension funds is still profitable, although increased trade surpluses of Japan vs. the Euro Zone may hamper the rise of the Euro vs. the Yen. At this point, the Euro Zone is going to hang in there - and the Euro still also hang in there against the Yen given the 300 basis point or so of yield differential.

The real bull market of the Yen vs. the Euro, however, will come if/when we "transition" from a deflationary boom to a deflationary bust, as Japanese investors repatriate their capital from overseas and as foreign investors sell off their assets in order to pay back their Yen loans, ending the so-called carry trade (e.g. Korean investors currently buying Korean real estate with Yen-denominated mortages).

This occured in 1990 to 1993 (as the Nikkei and Japanese market topped out, and later as Great Britain bailed out of the ERM in 1992 and as other European countries devalued in 1993), as well as 1998 to 2001 as the Russian, Brazilian, and LTCM crises enveloped the globe, ultimately ending with the technology bust in late 2000 to 2001.

That is, instead of "only" shorting stocks, bears can also probably benefit by buying Yen or Yen call options when the inevitable topping out of the market occurs. The latter may be a "safer" option given the fact that the Yen is now immensely undervalued against the Euro (and even against the US$) on a purchasing parity power basis.

[rffrydr]

This first posted low has so far held in the face rapid and repeated disappointing news over the last two weeks, culminating in lower-than-expected prices and sales Japan.

Carry too steep to buy leveraged but went short Euroyen. More important for its effect--eyes now peeled.

http://www.futuresource.com/charts/charts.jsp?s=SEYAH07
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

MOF says yen is NOT overly week and should trade "freely" while deflator is deflated in adjustment of GDP series:

http://www.washingtonpost.com/wp-dyn/content/article/2006/10/23/AR2006102301257.html

If US GDP doesn't come in lower than expected on friday this could be a new leg to the global party!
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

BOJ now officially ''monitoring" carry trade.

http://www.dailyfx.com/story/dailyfx_financial_markets_headlines/Carry_Trade_Rumors_Strengthen_Yen_1161153241870.html

Perversly, if the economy doesn't start heating up, this will probably encourage more selling into those strong hands.