BEST IDEAS UPDATE: RE-SHORTING THE YEN HERE

Takeaway: Just managing immediate-term risk within the construct of our intermediate-to-long-term theme.

SUMMARY CONCLUSIONS:

  • Our proprietary quant signals are telling us now is a good time to re-short the Japanese yen, which we’ve done through the etf FXY. We’ve got levels for that security, the USD/JPY exchange rate and the Nikkei in the charts below.
  • Regarding Japanese equities specifically, shorting the yen here probably means some reflation across Japanese stocks – almost by default to some degree. Enjoy this trade while it lasts; like the many others before it, this latest Keynesian experiment won’t end well for the Japanese economy.
  • In addition to this update on Japanese risk, we take a step back and walk through our broader process in greater detail for those of you who may be interested. As always, we're around to dialogue further.

Earlier this morning, we got our quantitative signal to re-short the Japanese yen, our Macro team’s best idea on the short side with respect to the TREND and TAIL durations.

Since peaking intraday at ¥88.62 per USD on early Monday morning and €120.05 per EUR on Sunday night, Japan’s burning currency has corrected to another lower-high on the strength of concerned commentary out of Japanese officials and some degree of profit taking ahead of next week’s BOJ board meeting.

@Hedgeye, we always find it helpful to remind existing clients and educate new clients on our process, which is two-fold in nature:

  1. Fundamental RESEARCH themes – longer term in nature (intermediate-term TREND and long-term TAIL)
  2. Quantitative RISK MANAGEMENT overlay – shorter term in nature (immediate-term TRADE)

Adhering to this comprehensive approach helps us to:

  1. Extract alpha by trading risk ranges within the construct of a security or market’s directional trend;
  2. Avoid “swinging” at outside pitches (i.e. head fakes) on the research front; and
  3. Hone in on market timing around the key events and catalysts embedded in our best ideas.

With respect to the Japanese yen, we became the bears on Japan’s currency back on September 27, and, as we pointed out on yesterday’s 1Q Macro Themes presentation, there are a number of reasons why we think the yen will continue to trend  lower vs. peer currencies over the intermediate term. To quickly recap those POLICY catalysts:

  • MONETARY: A +100bps revision to the BOJ’s current +1% INFLATION target (likely at the JAN 21-22 BOJ board meeting);
  • FISCAL: A meaningful expansion of public expenditures and sovereign debt issuance in the FY13 budget on top of the recent “large scale” stimulus package (additional details in the coming weeks);
  • MONETARY: An erosion of BOJ independence, with the BOJ governorship and two deputy governorships eventually assumed by politicized puppets (late-MAR/early-APR);
  • MONETARY: Experimental monetary POLICY – particularly a foreign asset purchase program (likely several weeks after the previous catalyst materializes);
  • FISCAL: The LDP wins a majority in the Upper House pending elections late-JUL/early-AUG, paving the way for a full-fledged assault on Japan’s public finances; and
  • FISCAL: A VAT hike delay (discussions to flare up in late 2013).

As it relates to the aforementioned commentary, both Economy Minister Akira Amari and Chief Cabinet Secretary Yoshihide Suga made public statements this week highlighting the expected adverse impact of “excessive” exchange rate depreciation upon the Japanese economy.

Personally, I think they were simply jawboning to reduce international criticism of their beggar-thy-neighbor monetary policies, as highlighted by recent comments out of Korean, Eurozone and Russian officials in the week-to-date. All this means to us is that the yen won’t go to ¥100 per USD next week…

As we pointed out on slide #52 in the aforementioned presentation, it truly is Japan’s turn to take center stage in the global Currency War.

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As such, we see no need to alter to our structural bias on the yen in light of these explicitly hawkish comments. Prime Minster Abe and Finance Minster Aso are likely going to need to see a much lower exchange rate(s) if they are even going to even sniff their +3% nominal GROWTH and +2% INFLATION targets on a sustainable basis.

Regarding the upcoming BOJ board meeting, to some degree, their likely adoption of a +2% INFLATION target and incremental monetary easing was somewhat priced in Sunday night/Monday morning, prompting some investors to reduce positions. Moreover, the fact that Amari himself plans to attend the meeting may be quashing some hopes of anything truly meaningful on the easing front.

While this may be true to some degree, we continue to look well past next week’s meeting and to mid-FEB when Japanese policymakers plan to commence discussions on who will replace the upcoming three vacant seats atop the BOJ board.

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All told, our proprietary quant signals are telling us now is a good time to re-short the Japanese yen, which we’ve done through the etf FXY. We’ve got levels for that security, the USD/JPY exchange rate and the Nikkei in the charts below. Regarding Japanese equities specifically, shorting the yen here probably means some reflation across Japanese stocks – almost by default to some degree.

Enjoy this trade while it lasts; like the many others before it, this latest Keynesian experiment won’t end well for the Japanese economy.

Darius Dale

Senior Analyst

 

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