Conclusion: We’ve found an attractive price to re-short the Japanese yen, a currency we remain bearish on from a long-term TAIL perspective.
Position: Short the Japanese Yen (ETF: FXY)
This afternoon, Keith re-shorted the Japanese yen in our Virtual Portfolio, which, is up roughly 70-80bps vs. the USD today – mere hours after the BOJ incrementally eased its monetary policy by expanding its Asset Purchase Program by +33% to ¥40 trillion yen!
Global currency markets are clearly sending a negative signal to U.S. policymakers, given that the USD can’t even catch a bid vs. the yen in the face of all that has occurred overnight. Portfolio positioning aside, that is not a good leading indicator for the long-term health of America under the current fiscal and monetary policy setup. And as the U.S. and Japan are highlighting, the international currency war is alive and well.
Digging deeper into the weeds, we can pull out one JPY-bullish nugget from the BOJ’s press release today: they are increasing their long-term inflation forecast (through MAR ’14) by +40% to +0.7% from +0.5% per annum. This puts them within 30bps of their +1% target from an expectations perspective, meaning they are less likely to “pursue powerful monetary easing” (Shirakawa’s own words) at the same pace over the intermediate term. Thus, expectations for BOJ balance sheet expansion over the intermediate term are being reined in, on the margin.
That said, however, the focus of our long-term bearish bias on the yen (woeful fiscal policy aside) has been centered on the changing BOJ board dynamics (still TBD) and Shirakawa’s expiring term, which ends in APR ’13. If the current degree of political pressure upon the BOJ is any indication, he will very likely be replaced with a dove that is highly committed to ending deflation through monetary policy measures – something Shirakawa isn’t fully on board with:
“Monetary policy alone cannot solve deflation… We are conducting policy at an appropriate pace. Easing of course isn’t something we’d continue to do every month.”
In the context of the evolving fundamental story, Keith’s quantitative levels are signaling to us that this is a good price to short the yen via the ETF “FXY”. Risk management levels are included in the chart below.