Viewing entries tagged with 'Japan'
How strong is the USD ? Is the strength likely to last?
These two questions obviously go to the heart of matters at the moment and if the answer can be found then we can potentially unlock great profits.
After years of being shunned it appears that the U.S. is once again a preferred destination of investment. Since the start of the century, and accelerated by the onset of the GFC, investment funds flew out of the U.S. and headed for emerging markets. Such was the magnitude of the drive to exit ‘old’ for ‘emerging’ that a new term was coined. The rise of the BRIC’s (Brazil, Russia, India and China) was on everyone’s radar ……largely at the expense of the U.S.
However the U.S. has always been an early mover and we must admire them for the significant policy responses that were implemented in the wake of the GFC (compared to say the Japanese after their stock market collapse in 1989 which even until today was never adequately dealt with). These actions appear to now be bearing fruit just at a time when the BRIC’s, particularly China are slowing a touch.
Thus the massive flow of funds from old to new now looks to be slowing or even reversing.
Looking at the DXY chart this theme is strongly borne out.
The monthly chart of the USD Index is particularly revealing. Firstly there appears to be a long term ‘rounding bottom’ formation of some 10 years in the making. And significantly we are on the cusp of 2 bullish engulfing months within the last 4. To me that speaks volumes to the amount of USD buying presently going on. If history generally repeats, then the implications of a close to the month for the USD at these levels, implies multiple months of further USD gains.
The USD Index can be traded via the standard Futures contract or a CFD, both available on your BBY Online platforms. Or you may wish to simply spread USD risk through some of our old favourites in currency land, AUD, NZD, EUR, GBP and JPY. Indeed CHF could be added to this mix as a number of high profile analysts are calling for some serious weakness in CHF going forward, which makes Thursday evenings GDP release for Switzerland a must watch event (6.45pm NZT).
I have profiled (ad nauseam) the potential for JPY weakness over the last 6 months of last year with good effect as the USD/JPY rose from 77.00 to 90.00 and the NZD/JPY from 58.00 to 75.00 in the same period.
What I haven’t done is document the opportunity for very large rises in Japanese stocks.
The real speed of the JPY move has come as the market came to understand that former PM Abe would once again hold power, pledging to learn from his previous mistakes as PM and essentially do the opposite (monetary policy wise) to his last tenure. Mr Abe says that in 2006 he mistakenly backed the BOJ when they raised interest rates. Following that decision the Nikkei stock index fell by half and the JPY appreciated by 40% against the USD.
Now Mr Abe is back at the helm and with his pledge to enforce a 2.0% inflation target on the BOJ, and the measures they’ll need to implement to achieve that will have to be nothing short of extraordinary. Indeed, one analyst I have come to respect, says Abe’s program will be like Bernanke’s but ‘on steroids’ !
Now to understand the potential for Japanese stocks we need to look back a bit in history. In 1989 the Nikkei Index was close to 40,000 and only this month the Nikkei was languishing below 10,000…………………incredible that the valuation of Japan’s corporate sector is currently worth ¼ of what it was more the 20 years ago. Now that’s a bear market huh? Here is a chart back to 1963 (great year that by the way!)
Now the other chart that screams that Japanese stocks are absurdly cheap is the Price to Book ratio that shows that in 2011 (I couldn’t find a more up to date chart but I understand that ratio hasn’t changed much) the index as a whole was trading BELOW is net asset backing at 0.9 !
So here’s the nib. Japan has a stock market that is super cheap (ridiculously so?) and now they have a government hell bent on cutting interest rates and printing money forcing investors back into stocks. That and the weakening JPY, which significantly helps the blue chip exporters, should see Japanese stocks much higher this year.
I’ll be spending the rest of this week looking for the best vehicles (financial instruments) to express this trade and will revert. For now I’ll buy a small amount of Nikkei and look to add a bigger amount on any dip.
The USD/JPY has attained the state that I refer to as ‘trending’. Price pushing up hard and fast against spaying Bollinger Bands . The ‘morning star’ rejection of lower levels that I documented on the 10th of November has been a wonderful indicator.
From observing this technical state in the past I’ve noted that ‘pullbacks against the trend can be quite sharp but they are usually brief by time’ (24/48 hours).
This pair, in my opinion has been incredibly depressed for a number of years, and it could really fly going forward. Why not 100+?
For a bit of perspective (and showing my age) this pair was at 250.00 when I started in FX and had been at 360.00 in the late 1960’s.
What about Gold (the store of value as central banks globally attempt to inflate their way out of trouble) versus the JPY? Check the 1 year consolidation break out!
And NZD/JPY ? The Christchurch rebuild will make NZ’s economics look unlike any other western economy and on the other side of the ledger Japan’s problems (which I’ve documented many times recently) undermines the JPY. 100 on this cross anyone?……………………….and you get paid to hold it!
A trade weighted type portfolio of each of these pairs may be vastly rewarding going forward.
This trade is progressing slowly but surely. To recap, the bones of this trade are;
# The 30 year run of trade surpluses has now turned to deficits as the Japanese turned off their nuclear power stations after the Tsunami inspired Fukushima disaster. As a result the Japanese now import the vast majority of their energy requirements.
# Japan’s demographics are poor with the population forecast to decline to 90 mio by 2055 from the 127 mio peak in 2004. Those citizens that are left will be much older too.
# The Bank of Japan has set forth on a new round of monetary policy easing. Top Japanese research house Nomura have been widely quoted recently regarding the new policy saying that the “JPY is likely to weaken due to the BoJ becoming more proactive as a result of likely changes in government leadership as well as changes at the Japanese central bank in coming months.
# …and the budding theme that we here at Edge Capital are watching with great interest is the vast supplies of cheap energy (shale gas) that the U.S is currently harnessing. We think this could be a major kicker for the U.S in coming years. Cheap currency and super low interest rates have been prevailing for 5 years now, add super lean business organisations and top it off with cheap energy. That should be one tasty cake when baked.
P.S. Got to love NZD/JPY on this basis too !