For the past month the yen has been confined to an increasingly narrow range. On June 8th, the USDJPY touched a low of 79.69, staged a feeble rally to 81.052, and has since continued to meander sideways within a narrow range The spread between the 20 day Bollinger bands has narrowed to 1.24 points. Eventually there will be a break out, and should this be combined with increased volatility, the move might be substantial.
The clean up from the earthquake and tsunami continues, and their are some signs of expanded economic activity. Last week the y/y comparison of retail sales, though down 1.3% was still a nice improvement from the previous period's -4.8%. Preliminary Industrial Production jumped from a positive 1.6% to 5.7%. The important Tankan Manufacturing Index, however, showed a drop from 6 to a -9, perhaps reflecting a portion of Japanese manufacturing still crippled by the lack of power, and the remnants of the storm's devastation.
Japan has had a series of ineffectual prime ministers, and the current PM Naoto Kan is continuing that tradition. Kan did survive a no confidence vote a month ago, but only because he said he would retire some time in the near future, after important legislation is passed. Kan's critics are becoming louder as reported by Lisa Twaronite in Market Watch:
"Even established media aren’t mincing words when it comes to Kan. In a
scathing editorial Wednesday, Japanese business daily Nikkei called Kan
“Ditherer in chief,” and called on him to step aside and make way for
someone competent.
“To prevent the chaotic political situation from deteriorating further,
Kan should promptly resolve pending issues and hand over power to a more
capable leader,” Nikkei said.
Kan has hinted he might step down in August, when the current session of
parliament ends, but he could linger until autumn. As the weather turns
cooler, the Japanese government will start to run out of funding
options unless it’s allowed to issue the new debt."
But if Kan leaves office, who will be next? The Japanese economy has long been suffering from deflation, despite the massive deficits the government has run, another futile effort of the Keynesians in government to spend while the private sector wants to save. The current debt to GDP exceeds 200%, among this world's highest, and government revenues are less than 60% of their expenditures. Slow the spending, and the chances are this will slow the economy. There will be some tough problems for the unknown successor to the dithering PM Kan.
In recent years the yen has enjoyed some popularity as a safe haven currency, but as the creditors have become increasingly aware of the debt problems in the developed world, this appeal may be waning. Further the yen's share of global currency reserves did not increase during the most recent quarterly IMF report. The report said that yen reserves were 3.8% of total reserves at the end of Q1. This was the same as the end of the previous quarter.
The latest COT report shows large spec reduced their yen longs by 12,963 contracts and increased their shorts by 5,686 contracts, however the big spec still remains long 13,350 contracts. Usually the large and small specs are on the same side of the market, but this is not the case in the yen. Small specs are big players in the yen futures and remain short over 12K yen contracts.
The Japanese government like other developed countries is confronted with serious fiscal problems. While this does not appear to be an imminent problem, combined with the pending political uncertainties, this might be a reason for the market to discount some risk.
The composition of traders does not seem to be reason for concern about a market squeeze. What might be a concern, however, is the lack of players in the yen futures market. The open interest is small, meaning there are traders now resting on the sidelines, waiting for a perceived opportunity. If the yen strengthens versus the USD, this will incite the ire of the Bank of Japan as well as the big car companies, and other exporters such as Sony. Perhaps we are wrong but we see little downside potential.
Let's try to scalp the market for the long side, buying the USDJPY on a retreat to the middle of the two BB's, around 80.55. Put a stop about 79.80, and leave the top side open and we will see what unfolds.
|