TRADING ABENOMICS FROM HERE

Takeaway: Post the Diet Upper House elections in JUL, the core driver of the USD/JPY cross will increasingly become the state of the US economy.

JUST BULLETS & CHARTS:

 

  1. Over the past month or so, the trend of USD strength vis-à-vis the JPY had been suspended – until this most recent two-day explosion of a move (from 98.65 to 101.93)!
  2. While we remain bearish on the Japanese yen with respect to the TREND and TAIL durations, it would be prudent not to chase the USD/JPY cross up here. In fact, per our quantitative risk management levels, the market is at a good spot to be booking some gains in the SHORT yen/LONG Weimar Nikkei trade.
  3. We reiterate that our thesis has legs on strong US consumption growth, as well as a perpetually-widening divergence between Fed and BOJ monetary policy. The pace of the US recovery and investor expectations of the FOMC’s next move will also determine the pace of yen depreciation from here (thus far, it’s been mostly a Japan-driven phenomenon).
  4. Is this the mid-to-late 90s all over again? The USD/JPY cross ripped from 80 to ~147 over a span of four years as the respective policy paths for the Fed and BOJ diverged substantially – as we believe they are poised to do once more with respect to the long-term TAIL duration.
  5. That’s precisely why continued improvement in the domestic housing and labor markets remains so critical to the US side of our thesis. The Fed has already signaled what would get them to taper the pace of asset purchases or completely turn off the QE spigot and FOMC leaks altogether.
  6. A 6-handle on the US unemployment rate – a risk that recent initial jobless claims prints have “activated” – would really start to make the last remaining yen bulls (i.e. just Japanese corporations and Japanese domestic investors; the sell-side has come around to our view and the buy-side is heading in that direction) extremely nervous.

 

CHART 1:

TRADING ABENOMICS FROM HERE - 1

 

CHART 2:

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CHART 3:

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CHART 4:

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CHART 5:

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CHART 6a:

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CHART 6b:

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CHART 6c:

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CHART 6d:

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CHART 6e:

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Remember, trading global macro is not the same as trading equities and corporate credit. In the micro world, consensus views tend to perpetuate inflections and regression to the mean as fundamental data gets increasingly priced in.

 

Conversely, in macro markets – where asset allocation shifts tend to be glacial and self-reinforcing – consensus views tend to perpetuate reflexivity as incremental parties (be they asset allocators, sovereign wealth funds, central banks, etc.) crowd into the trade. Keep that in mind as you contemplate where the yen and the Nikkei could go from here.

 

Enjoy your weekend,

 

Darius Dale

Senior Analyst