Well, today we now further complicate this dynamic with rumors that Japan is going to sell $100 Billion of their U.S. Treasuries. On the face of it, the move to sell would cause interest rates in the U.S. to rise and thus could be expected to cause a rise in the dollar and possibly break the recent dollar carry (just a theory, may not work that way in practice, watch gold).
Now please go back to Yves chart. You will see that he drew a bright green line across the 100 Yen to the dollar mark. That is the critical area and the Japanese need to force the Yen back down to get the relationship to the dollar above 100 to 1.
Of course their gambit to sell treasuries, if more than a rumor, could have big time unintended consequences such as other countries could heard out of Treasuries at the same time, the effects of which would not be pretty for the world. Let’s face it, eventually each country will act on its own behalf to protect its interests. When forces reach extreme out of balance, you can bet that the water will eventually break all dams. These imbalances have been known and ignored for far too long…
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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