One of the best macro trades of the past couple of years has been to be short the Japanese Yen. Since the introduction of Abeconomics in late 2012, the Yen has declined from 78 to 120.
The ride has been especially smooth, with only one real hiccup during the summer of 2013 when the Yen rallied from 103 to 94. Apart from that early test of resolve, Yen shorts have had it easy.
And the hedge funds and other speculators have taken advantage of this terrific trend. They got short big time in 2012 and stayed short for the next couple of years.
Until now… During the past month the specs have been reeling in a lot of their short positions. Late last fall we were still bouncing around near time record speculative short positions, but last week that had fallen to the least amount of speculative shorts in the past few years.
This short position covering might be well timed as for the first time in a long while, the Japanese government is sending signals that the Yen has fallen enough. Yesterday in an interview with Bloomberg, Koichi Hamada an economic consultant to Prime Minister Abe, made comments that an exchange rate of 105 per dollar would be “appropriate.” He said that he doesn’t expect the Yen will fall much further and that 125 per dollar wouldn’t be justified.
There has been increasing pressure on Prime Minister Abe to address to the Yen weakness. Although the extreme currency weakness was at first welcome and expected given the massive quantitative easing program, it has reached a point where any further weakness probably does more harm than good.
Even though the speculative Yen short position has been whittled down, the market is still leaning against the Yen. When Prime Minister Abe surprised the market with the second round of expanded quantitative easing in the fall of 2014, he taught speculators that betting against him was a poor risk reward. His determination in achieving his goals of inflation no-matter-the cost has created what the market has perceived as a one way bet. I can’t tell you the last time I heard a trader advocating a Yen long position. Combined with the across the board US dollar strength, betting on Yen strength is a forgotten play.
This new development of Hamada’s signals has created an interesting opportunity from the long side. No one is set up for this trade. No one.
Not only that, the Yen is already showing signs of being tired. Since the beginning of the year, it has been going sideways while the US dollar has been rocketing against most other currencies.
I am buying some Yen in here, risking that we won’t get a breakout above the recent range high.
The technicals show that the Yen weakness is petering out, the smart specs have covered, but the market is still anticipating further weakness, and most importantly, the Japanese government seems to be sending signals we have reached the end of this trend. This all adds up to a good risk reward for Yen long positions.
Gold – a crappy looking chart, along with a great looking one…
The last half a year has been disappointing for gold bulls. Although the gold bugs might tell you how the trading is setting up for a big move higher, I think the best you can say about the technical action is that at least it has stopped going down.
But the real story for gold is how it is behaving for non-US dollar holders. Have a look at this chart of gold denominated in Euros.
That is a stunningly good looking chart. I am talking Kate Upton technical curves here. The trend is so clearly higher. The gold bugs should stop pulling up the chart of gold in USD and instead should put up gold denominated in other currencies if they want to make a bullish technical argument…
Thanks for reading,
the Macro Tourist