Japanese Yen & the Nikkei
On May 22, 2013, the Japanese yen (Figure 1.1) traded to 103.74, its lowest level since October 3, 2008. Also on May 22, 2013, the S&P 500® Index (SPX) (Figure 1.2) traded to its historic all-time high at 1687.18. In the weeks that have followed, many have correlated the now SPX 3.6% correction with a reversal in the yen. In fact, since May 22, the yen has appreciated a staggering 9.1%, as the Nikkei 225 (Figure 1.3) has fallen 20.4%.
I would argue that the yen appreciation and Nikkei selloff are less about fundamentals and largely based on technical conditions as well as the speculative fervor.
Abenomics as it has become known is just getting started. Bank of Japan Governor Haruhiko Kuroda is in the second inning of implementing historic easy monetary policy. By comparison I would say Kuroda is where Federal Reserve Chairman Ben Bernanke was in March 2009.
Abenomics is attempting to utilize both growth-oriented fiscal policy measures as well as asset purchase support monetary policy. Investors should expect much more to come in Japan’s efforts.
Governor Kuroda has yet to implement extending the maturity of loans to banks. On July 21, the Upper House elections in Japan will be held. In their wake, expect further fiscal policy initiatives such as incentivizing corporate capital spending, possible corporate tax cuts, and improved labor laws particularly for women.
Therefore, view the recent volatility in the Japanese markets as reflective of highly speculative levels that are normalizing. Not a fundamental shift, or disappointing shift, in policy. Yes, the yen has appreciated 9.6% since May 22, but it remains down 22.3% from its September 13, 2012 high of 77.13. Likewise, the Nikkei is down 20.4% since May 22 but still +22.04% for 2013 and +48.05% since June 2012.
On Friday after the close, the Commodity Futures Trading Commission released its commitment of traders report (Figures 1.4 & 1.5) reflecting speculative currency positions as of Tuesday, June 11. Net yen shorts fell by 72,906 contracts to levels last recorded six weeks ago – a positive step in reducing the high level of speculative positioning. However, overall yen shorts still remain large at $9.5 billion in value. Of interest is that euro currency shorts declined to their lowest level since February 2013 and now stand as net neutral.
From here I expect investors are best served focusing on the yen’s technical formation. The current appreciation has retraced 35.4% of the September 13, 2012 to May 22, 2013 downtrend. However, the overall 2013 technical formation still remains bearish. Two lower highs from February and April remain not violated. While now below its 100-day moving average, the yen still remains above its 200-day moving average.
- Two critical resistance areas rest above the market
- April 2, 2013 high at 92.57
- February 25, 2013 high at 90.88
- 200-day moving average is 89.42, which has not been violated since mid-November
Similar to my expectations for the SPX in June, the yen remains in “wait and see” mode. Once the new calendar quarter begins in a few weeks, implementing portfolio strategies may be considered. For now let the “30 days of frustration” I expect for the global markets in June to play out.
While we wait, understanding the evidence from the markets is mandatory. The evidence for the Japanese yen and Nikkei is clear; nothing about 2013 fundamental conditions has changed. The Japanese currency and equity markets are in the midst of technical corrections to work off highly speculative conditions. Once that has been accomplished, I expect the prevailing 2013 trends to resume and have a positive impact on global risk assets.
Figure 1.1 Japanese Yen, June 2012 to June 2013
Figure 1.2 S&P 500 Index, June 2012 to June 2013
Figure 1.3 Nikkei 225, June 2012 to June 2013
Figure 1.4 Commitment of Traders Report, Japanese Yen 2013
Figure 1.5 Commitment of Traders Report, Japanese Yen 2011 to Present