Why the Yen will Rally Again


NOT BUYING IT - I know the US Dollar has been trying to make a comeback and with the move, we've seen a push higher in USDJPY. But at the same time, I'm still having a hard time seeing USDJPY much higher given the current environment. The Yen has been weak because the US Dollar has been in demand on yield differentials post the FOMC decision. At the same time, the Yen has been weak because risk markets have been holding up well. Remember, if the market is feeling good about stocks, it is feeling good about the risk outlook and this makes for a weaker Yen, with the virtually zero interest return currency being used to fund risk investments (ie borrow Yen at nothing and then use to invest). So I understand why the Yen has been weaker. It's just I don't believe this can be sustained right now.

cartoon sep 28

ONE - So here are two things to think about that would argue for another wave of demand for the Yen. I suppose the reason to put forward first is the one that has been more of a trend of late. That reason is the trend of US Dollar weakness in 2017. A weaker US Dollar has meant weakness in the US Dollar across the board. This means that if we see another round of intense US Dollar selling in the sessions ahead, it will likely fuel Yen demand as well. Perhaps the Yen doesn't rally as much as some of the other currencies, but it should rally. A lot of the US Dollar story has been about the US administration pushing for a weaker US Dollar to further its protectionist cause of boosting manufacturing and focusing more on exporting US products abroad. In order to do that, you want your currency to be lower against all currencies to gain that competitive export advantage. So the trend is one reason.

I believe the #Yen still has another big run...and that means $USDJPY lower again.

TWO - The second reason is one that has yet to materialize but is one that everyone is pretty certain is around the corner and about to happen. That reason is a capitulation in the US stock market. Such an event would inspire an intense round of flight to safety demand and all of that investment that was funded in Yen, will then be liquidated and pulled back into Yen. In this case, we see another reason for the Yen to rally (USDJPY lower). Now it's important to understand the Yen isn't a safe haven currency, and is instead a funding currency that behaves like a safe haven given the fact that it benefits when risk comes off. But Japan isn't a safe haven economy by any stretch. The reason I bring this up is because while I believe we could see a period of Yen strength in the event of a stock market drop, at a certain point, if the risk continues to come off, the Yen will become less attractive again as the market is done pulling back into Yen and starts to move the Yen into a real safe haven like the US Dollar.

STRATEGY - So with all that said, I will be looking to build into long Yen exposure (short USDJPY) if the opportunity presents. As far as the rest of the book goes right now., we continue to hold our bullish US Dollar view over the coming sessions, while waiting on some form of a reversal in the equity market, which still may take time to play out. When it happens, it will happen fast. But until it happens, we just need to continue to be patient on that front. Again, all of the stars are aligned and we are at that point where either the Fed continues to push forward with normalization - and as the timeline is confirmed it knocks stocks, OR, the Fed gets worried again and scales back, with the worry also infecting investors this time round, with policy accommodation exhausted and the well already tapped into and dried up. So again, the writing is on the wall (and has been there for a while), and we just need to be patient.

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