On NOV 27, we published a note titled, “THREE COMPELLING REASONS WHY YOU SHOULD TAKE PROFITS IN THE ABENOMICS TRADE NOW” in which we called for a 3-6M correction in the Abenomics Trade (i.e. short JPY/long Japanese equities); while we don’t want to get caught up in overreacting to today’s FOMC decision to commence tapering, that is no longer a view we have any conviction in.
In the note specifically, we analyzed three catalysts in support of that now defunct thesis:
- The Fed will likely dominate headlines with surprising levels of dovish monetary policy amid a 3-6M monetary and fiscal policy vacuum in Japan.
- Sentiment towards Japanese equities amongst foreign speculators has reached euphoric levels.
- Speculators have recently adopted an overwhelmingly bearish position on the yen. Historically, the USD/JPY cross has faded hard from such aggressive swings in the net length of the futures and options market. Moreover, what’s bullish for the yen has been almost perfectly bearish for Japanese stocks.
Clearly, catalyst #1 – which was easily the most important of the three – has now been voided. As such, we are no longer as concerned as we were about the lopsided nature of consensus positioning – which has actually gotten worse (i.e. even more net short) since that note was published.
In the spirit of keeping score (timing is the most important factor in any investment thesis we present to subscribers), the USD/JPY cross has appreciated a solid +2.1% since then, while the Nikkei 225 Index has appreciated +0.9% since then (not inclusive of what is likely to be a huge melt-up overnight).
Thankfully we weren’t brash enough ignore the existing quantitative signals by making a call to buy the yen or short the Nikkei. Wrong is wrong, however. Now it’s time to move on and trade the market that we’re being presented with today.
As such, while you’re likely to see a near-term correction in the USD/JPY cross as event-driven funds take profits, we now expect what we’ve been expecting since early in the fourth quarter of 2012: the USD/JPY cross is on its way to 125 (and counting) over the intermediate-to-long term.
Giddy-up – Kuroda’s just getting started (in recent statements, he’s actually been setting the table to incrementally ease monetary policy by mid-Spring of 2014). Meanwhile, it appears (for now at least) that the central planning law firm of Bernanke, Yellen, Dudley and Bullard LLP is running out of gas. That’s very bearish for the JPY in the context of the intermediate-to-longer-term monetary policy outlook in Japan.
Enjoy the rest of your evenings,
Associate: Macro Team