(Clifford Bennett – ACY Securities)
If you have a feeling the US dollar has already come too far? Then a way to play that thought, may well be to buy Japanese Yen.
My feeling is that the US dollar is due some consolidation of recent gains, but is still headed much higher overall.
Against the Yen though? Which has already fallen more than 25% since this whole Oil price shock post-Ukraine move really began, appears immediately problematic at these levels.
First of all, the market wrong footed itself, when it started talking about the Bank of Japan having to raise interest rates far too early. Where did that absurd idea come from back then. I said at the time, that Japan Inc has always been happy, historically, to let the Yen sink as far as possible. Until it became diplomatically untenable vis a vis its allies. Additionally, the economy was not yet on sure enough a footing or inflation high enough, to even begin to prompt the BoJ into action.
This time however, post today’s good GDP numbers, some movement in that direction, of a first rate hike eventually in the months ahead, must be afoot. That said, it will not happen overnight, but for the first time some speculation in this direction may be appropriate.
Inflation is warming, but is not hot enough on its own at 2.5% to force a hike. Inflation is though, clearly firming, and the BoJ would not want to allow the disasters of the USA, Europe and the UK to unfold there. With today’s GDP data, even though still modest at 0.9% for the quarter, and just 1.0 growth seen in the first half of the year, may be just enough to begin an internal discussion at the BoJ.
We will not need, given extreme market positioning now in place on the short side, an actual rate hike. Just the mere smell of such an eventuality could provoke some shorts into buying back and there is Japan Inc. Having got their wish list revaluation of the Yen, beginning to take advantage and hedge forward their export receipts. Something to definitely keep an eye out for.
Against the Euro, just now, buying Yen could still be tricky as the world looks for a 75 point rate hike from the ECB. Such a move, the BoJ will not be matching/ So perhaps a direct USD play is more appropriate, as such hikes by the Fed are to some degree already priced in.
The key point, is extreme short positioning in the Yen market makes it vulnerable to a rally on just the hint of economic stability and a BoJ rate hike.
Yen opportunity? Market update [Video]
Japan’s Q2 GDP came in at 0.9% for Q2. Just enough with inflation remaining firm above 2%, for the BoJ to at last begin to discuss raising rates in 2-3 meetings from now. This could be enough to see a surprise turnaround in the Yen over the near term.