The views expressed in this column are solely those of
the author and do not reflect the views of SVB Financial Group, or Silicon
Valley Bank, or any of its affiliates.
After hearing that a
well-respected market pundit had reversed his position on the Japanese yen and
he was now a fully-committed BEAR on the yen, I thought I would check around to
see if market chatter had picked up on other market players, switching from
being bullish to bearish on the yen. Market chatter, of course, can now be
measured quite easily. A Google search of the words "JAPANESE YEN STRONG 2011"
got me 4,600,000 hits; a search of "JAPANESE YEN WEAK 2011" got me 1,100,000
hits. So, it looks like it hadn't picked up all that much (although for
comparison purposes, I wish I could repeat the exercise for specific dates last
week, last month and last quarter). Whatever the case, my interest was piqued,
and with the current market rate of ¥83.00/USD not that far away from November's
(dollar) low of ¥80.22, I wondered if this was a good place to be shorting the
yen. And, if not here, then where, and when?
So, I did my traditional
"3-dimensional" analyses — fundamental, technical and sentiment — on the yen,
which you will find below. I found that on all three fronts there were good
solid reasons for at least beginning to get your ducks lined up to take
advantage of a weaker yen going forward.
The
Fundamentals
Who would have guessed that the strongest currency in
the world last year was the yen, the currency of Japan, a country with no
natural resources of its own and always a buyer of commodities in a commodity
hungry world. It offers interest rates near zero in a market searching for
yield; it has an economy which has been in deflation for well over a decade in a
world of economic expansion (particularly in Asia!), and it has a stock market
that for years has been given scant attention by most of the big international
equity managers.
In 2010 the market ignored all these facts — facts
which under normal circumstances would provide plenty of fuel to drive the yen
lower. But instead, market players bought the yen like there was no tomorrow.
They argued that the Japanese yen was a safe haven from a weakening dollar and
from all the uncertainty in the global economy. They liked that Japan had a
trade surplus and a current-account surplus, which by definition
decreases Japan's dependence on borrowing from overseas (we wish we were so
lucky). They liked that Japan's central bank had refrained from excessive
quantitative easing. They were also encouraged by the strength of Japan's banks,
as they had not engaged in subprime mortgage lending, And lastly, but not
insignificantly, there were all those leveraged hedge funds and miscellaneous
speculators that had jumped on the yen bandwagon simply because the yen was in a
nice, steady secular uptrend (a dollar downtrend). As we all know, the "trend is
your friend." Any and all buyers of yen last year hit homeruns.
Well,
that was 2010, and this is 2011. Things are changing; the odds for a weaker yen
are definitely improving. The market is already predicting that the central
bankers of the major economies will be tightening monetary policies later in the
year. With Japan's economy still weak, the Bank of Japan will certainly be the
last central bank to raise interest rates. Sovereign bond yields around the
world are moving higher. Japan's 1.25 percent yield on long-term bonds is simply
not attractive (see below). What's more, investors have lost their appetite for
countries with government debt troubles. With Japan's gross debt approaching 200
percent of GBP, or 100 percent when you net out inter-agency crossholdings, they
are at the top of the list. To make matters even worse particularly for global
investors, Japan's sovereign credit rating was downgraded by S&P in January
and just this morning Moody's changed their outlook from stable to
negative!
Source: Bloomberg
The
Technicals
The chart below shows the monthly price action of the USD:JPY
since 2005. You can see that the dollar has been in a fairly consistent
downtrend since mid-2007. However, there is cause for concern from a technical
perspective. The pattern of the last three lows, or troughs, in the price action
in the upper window (see that each successive low, as indicated by the red
arrows, is lower than the previous low) coincides with corresponding lows or
troughs in the momentum index (which measures the rate of change) in the bottom
window, but they diverge in direction! The lower lows in the price action
correspond to higher lows in momentum. Any chartist worth his oats would
say that this pattern strongly suggests that higher prices are
ahead.
USD:JPY 2005 - 2011
Source: Bloomberg
Sentiment
(Consensus)
Bloomberg's survey of forecasters from 42 major international
banks shows that on average they expect the Japanese yen (vs. the U.S. dollar)
to weaken modestly over the coming quarters and into the next two years. You can
see that the low end of the forecast range indicates that even those forecasters
who are bullish on the yen do not anticipate much of a gain beyond today's
exchange rate.
Source: Bloomberg, SVB Financial Group
So, when
should we pull the trigger?
The smart money is betting that the yen will
weaken. Using fundamental, technical and sentiment analyses you can certainly
find good reasons to join in. However, as a result of the turmoil in the Middle
East, the dominant theme driving the yen right now is its status as a safe haven
currency. We certainly hope that order in the Middle East will resume as quickly
as possible; however, that may take longer than we can hope for. In the
meantime, you may want to start getting your ducks lined up.
The views expressed in this column are solely those of
the author and do not reflect the views of SVB Financial Group, or Silicon
Valley Bank, or any of its affiliates. This material, including without
limitation the statistical information herein, is provided for informational
purposes only. The material is based in part upon information from third-party
sources that we believe to be reliable, but which has not been independently
verified by us and, as such, we do not represent that the information is
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