Japanese Yen To Surprise (To The Upside)
Tiho Brkan | Oct 30, 2012 08:05AM ET
It is my opinion that there isn't much value anywhere in the financial market environment today. However, one asset class that remains out of favour with investors are Soft commodities such as Coffee, Cotton and Sugar with price currently down between 26% to 32% from a year ago.
Furthermore, Soft prices are down even more from their peak in February and March of 2011. Most retail investors have given up on these assets, while technician traders are calling charts "ugly", "awful", "value traps" etc. This is all happening as investment banking analysts forecast large surpluses for 2013 and recent Bloomberg article described the overall mood of the market quite well. And I quote:
"All but one of 27 economists surveyed by Bloomberg News expect the central bank to add to stimulus for the second time in two months at a policy board meeting on Oct. 30. At its last meeting that ended Oct. 5, the bank held off from more easing after expanding its asset-purchase program in September."
So essentially you get the point. As I stated at the beginning of the article, almost everyone, everywhere has turned negative on the Japanese yen. But it is not only about what they are saying on TV, radio or internet. The proof is in all the indicators US traders track. Consider the following:
Recent data as of last Tuesday showed that market participants like hedges funds and other speculators now hold a net short position on the Japanese yen with a view of further declines. Since the data is delayed by a week or so, we can expect an even larger net short build-up by the time new figures come out, as prices have declined further and the consensus view has grown larger.
And when have hedge funds ever been right?
Even more importantly, small speculators also known as Dumb Money, are extremely short Japanese yen as of last Tuesday. Since the data is delayed, here too we can expect an even larger net short build up by the time new figures come out. Do keep in mind that this is now the second highest bearish bet against the yen, with March 2012 being a record bearish position.
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And when have the small spectators ever been right?
Cumulative amounts of sentiment surveys put together by the lovely people over at SentimenTrader.com into a tool called Public Opinion show that the overall mood on the yen is currently at 9 year lows. In other words, there is now outright consensus panic that the yen will decline very quickly and very rapidly.
And when has the retail crowd ever been right?
The options market has placed an amazingly high premium cost on USD/JPY Calls relative to Puts as measured by the Skew Index. That means the consensus in the options market is for the yen to weaken against the US dollar, as traders overpay for the value of Calls. They seem to be very eager to position aggressively against the possibility of further yen weakness, with Skew Index rising even above 2007 levels.
And when have the options traders ever been right?
- Finally, according to the SentimentTrader tool, the risk appetite within the market environment is currently very strong. That indicates market participates have more tendency to sway towards anything risky like equities, industrial commodities and higher yield currencies. The yen, on the other hand, tends to trade as a safe haven and tends to do well when risk aversion is widespread. Having said that, from a contrarian point of view, the best time to buy the yen is when the risk appetite is buzzing and that seems to be right now. After all when has the herd ever been right?
After all is said and done, we can see that various investment banks, market analysts, CNBC "gurus", retail traders aka small speculators, hedge funds, options traders, sentiment survey participants, futures traders and even the economists - all expect the yen to weaken in a one way bet. The consensus is so sure that the yen will weaken right now, that the sentiment surveys point to a 9 year low in a negative mood.
You are going to have to believe these guys and their opinions, because I do not. They claim we are in for a rise in rates by global central banks, that we are in for a period of low volatility, that we are in for a period of no financial market stress and we are in for a period of a weak yen which will drive the risk on trade.
My view is completely different as I expect the Japanese yen to surprise and strengthen from the current levels to all time new record highs. I do not see any reason for the yen to weaken just yet because historically the yen weakens substantially if and when interest rates by the Fed rise (or any other CB). The reasoning behind this is that Japanese capital chases higher yield abroad.
However, quite to the contrary, the yen has strengthened and most likely will continue its uptrend as the world remains in a ZIRP environment (Zero Percent Interest Rate Policy). What happens when the Fed (and other CBs) keep rates at zero (plus engage into QE activity) is capital repatriation by Japanese households. Keep in mind that currently, the Japanese household wealth held aboard is relative to 55% of Japans GDP and that Japan is about to overtake China as the largest holder of Treasuries. So there are a lot of assets to repatriate!
To add fuel to this fire, the world economy is slowing with the eurozone already in a recession. If and when economic activity deteriorates even further, chances are that global central banks like the Fed and ECB will flood the system with liquidity similar to 2008, as they engage into even more stimulus measures and currency debasement. This will most likely increase the speed of capital repatriation by Japanese households and in turn strength the yen even more.
There is only one investor who remains bullish on the Japanese yen and seems to understand the underlying dynamics amazingly well. His name is Hugh Hendry and I highly recommend you watch his recent interview in the What I Am Watching section below.
He seems to understand that for the Bank of Japan to really be pushed into a Swiss Bank type of intervention of "fixing" or "pegging" the yen, the currency itself will have to appreciate much higher. Furthermore, Mr Hendry knows that "positioning yourself outside of an accepted belief system" and "rejecting the status quo" is one of the best ways to approach an investment. In other words, as I frequanelty say here on the blog... you are either a contrarian or a casualty and when its obvious to the public... it is obviously wrong!
What I Am Watching
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