(FXY) Archives - Page 15 of 16 - Mad Hedge Fund Trader

New BOJ Governor Craters Yen

At long last, Japanese Prime Minister, Shinzo Abe, has appointed a new governor to the Bank of Japan, Haruhiko Kuroda.

The foreign currency markets responded immediately, taking the Japanese yen down to ?94.60, a new three year low. It also broke new ground in a range of currency crosses, including Euro/Yen, Ausie/Yen, and Kiwi/Yen. It even weakened against that other despised asset class, gold, plunging to ?152,500. No surprise there.

I have known the good Mr. Kuroda for years, back when he was the Ministry of Finance official responsible for monetary affairs. He has a keen wit and a decent sense of humor that is rare for a Japanese government bureaucrat.

Most recently, I have bumped into him at various international economic forums in his capacity as president of the Asian Development Bank. Our running inside joke is that I go there to obtain English lessons from him, his being so incredibly fluent. That?s what a Master?s in Philosophy from Oxford University will do for you.

Kuroda?s language talents could well come into heavy demand in the coming months and years. He will have to explain to other developed nations why Japan has no choice but to collapse their currency to rescue its economy, at their expense. I believe the yen could fall to as low as ?150 in the years to come. You start hitting international political resistance at ?100.

So it is likely to be a long and drawn out battle. Expect to see a lot of dire headlines from the US government owned auto industry, and their for-hire congressional representatives. I saw this entire movie play out during the early 1980?s with the predictable end result that Japanese language ability is now a great advantage when looking for a blue-collar job in Ohio, Tennessee, Indiana, and Kentucky.

Kuroda?s appointment is a clear signal to the rest of us that the Abe government will be as aggressive as humanly possible in their yen weakening efforts. For those of us who trade, it means selling the current Berlusconi inspired rally in the yen, which may prove to be ephemeral, and buying the dip in the leveraged short yen ETF (YCS). The starting gun has been fired, and the leg to ?96 has begun.

Time to Start Selling Yen Rallies Again

Rumblings in Tokyo

Diary, Newsletter

I spent ten years of my life tramping in and out of Japan?s Ministry of Finance headquarters in Tokyo?s Kasumigaseki district. It was a dreadful reinforced steel and concrete affair with a dull grey tile siding that was so solidly built that it was one of the few structures in the city to survive WWII. But the building offered spacious prewar dimensions, with lovely high ceilings, and I never tired of walking its worn hardwood floors. I was there so often that some government officials thought I worked there, and they did eventually give me an office, the first ever granted to a foreign correspondent.

So to get an update on the Land of the Rising Sun I called a senior official whose father I knew well as a Deputy Minister of Finance for International Affairs during the 1970?s. I was a regular at his apartment in Shinjuku on Saturday nights, where we spent endless hours alternately playing chess and Scrabble over a bottle of Johnny Walker Red and smoking acrid Mild Sevens. We did everything we could to expand each other?s? Japanese and English vocabularies with the words not found in dictionaries. When the bottle was almost finished and his face was beet red, the Elvis impersonations would start.

My friend told me that the ongoing strength of the yen is rapidly becoming a major political issue in Japan. The spot market is threatened an all-time high only three months ago, and on a trade-weighted basis it was already at a new peak. Exporters were getting destroyed by the strong yen, which was making their goods increasingly expensive in a cost cutting competitive world.

This was forcing them to accelerate a 20-year effort by corporations to offshore production to China, which was ?hollowing out? Japan, and causing economic growth to bleed away, and unemployment to rocket. The situation was getting so bad that American companies that offshored jobs to Japan years ago, like Caterpillar (CAT), were taking them back home because labor costs are so high. His fears were confirmed by a Japanese GDP that shrank in Q4, 2012.

His masters have made repeated comments in the Diet, the Japanese Parliament, made comments in the Diet this week about his concern over yen strength. More specifically, the road is now clear is seeking approval for a much more aggressive stance to pursue Bernanke style quantitative easing to knock the stuffing out of the yen and stimulate the economy.
This time, the ministry has much more ammunition to work with. Japan has been running its first trade deficit in 30 years. This may not be an anomaly. In response to the tsunami induced melt down at the Fukushima plant, Japan is permanently shutting down a large part of its nuclear power generating capacity. At its peak, nuclear accounted for 25% of the country?s electric power supply. That is forcing a huge surge in oil imports from the Middle East that has greatly tipped Japan?s balance of trade against it. Crude?s recent surge from $84/barrel to as high as $98 has only made matters worse.

He then told me that, he too, was now learning to play Scrabble and asked me for my list of words where the letter ?Q? is not followed by a ?U?. I said that I was not inclined to disclose America?s most valuable trade secrets to a foreign competitor. However, in deference to his late father, he couldn?t go wrong starting with ?Qi?, ?Qabala?, ?Qadi?, ?Qaid?, ?Qat? and ?Qanat?. I hung up the phone and immediately sold more yen against the dollar.

Look at That Yen!

Newsletter

All of those years spent living in rabbit hutch sized apartments, getting hand packed by white gloved railway men into rush hour train cars, and learning an impossible language, are finally paying off.

I have to tell you, I really have to think hard to recall a plunge in a major currency that has been as dramatic as the yen?s over the past two months. Since the Mid-November route began in earnest, the cash market has collapsed from ?76.80 to ?92.60 to the dollar. That has taken the ETF (FXY) down from $126.30 to an eye popping $105.50. The double leveraged short ETF (YCS) soared from $42 to $57.93. It?s a good thing that I was short the entire time.

In fact, I have devoted 20% of my entire capital to short yen plays since the beginning of the year. Newly elected Prime Minister, Shinzo Abe, was my willing coconspirator this week, announcing one of the most ambitious, expansionary budgets in history. The vice governor of the Bank of Japan chipped in, suggesting that the yen had more room to fall. Another senior government official suggested that ?100 to the dollar might be a reasonable target. It seems that any time someone in Tokyo says ?boo?, another round of yen selling by traders ensues.

But like all good things, this trade is getting rather long in the tooth. I?ll tell you how this is going to end. When the cash market declines to ?96 to the dollar, the grumblings about unfair import competition by the US car industry will escalate to an uproar. At ?100 to the dollar it will balloon into a full blown trade dispute. So get ready to start hearing a lot about Japan?s unfair manipulation of their currency to undervalued levels, especially from congressmen from Midwest states with large car plants.

The yen will probably fall short of that. The last time this happened, in the early 1990?s, the US was afraid that Japan was taking over the world. Our country was recoiling from a Japanese share of the American car market that had ratcheted up from 1% to 43% in just 20 years. Remember the tome ?Japan is Number One?? You have to laugh now.

Those fears abated long ago. A Japanese collapse on the scale of an IMF bailout is now much more likely than Japanese dominance. It?s tough to smack down an international competitor that is trying to claw its way up after 20 years on the mat. One complicating factor this time is that the principal lobbyist against a stronger yen is now US government owned, General Motors (GM).

I get emails every day from readers asking if they should initiate, double up, or triple up their short positions in the yen. As of today, I am saying no more. My best-case scenario had Japan?s beleaguered currency plunging to ?92 over the course of the next several months. Here we are over that figure in just ten weeks. So at best, a short yen position is a ?HOLD? here. Don?t chase it any more. Remember, hogs get fed, but pigs get slaughtered.

Japan is not an entirely bad place. Certainly the world would be a duller, more boring place without sushi, sake, hot tubs, and karaoke. And I never heard anyone complain about those coed public baths. Too bad I could never find a pair of sandals that fit.

Six Month Chart

Five Year Chart

Why the Yen Will Never Recover

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If anyone is expecting the Japanese yen to take back the losses it has suffered over the last two months, you can forget about it happening anytime soon, eventually, or in your lifetime.

Naysayers have been pointing to this week?s policy meeting at the Bank of Japan as proof that the yen has stumbled in the international race to the bottom, and that it is running up the white flag of surrender in the currency wars. They point to the rise in the beleaguered currency from a ?90.16 to the dollar Friday low, back to ?88.4 in the cash market, and a gain in the (FXY) from $108.20 to $110.70. The inverse ETF (YCS) has backed off from $55 to $52.60.

There were several reasons for the pause. BOJ governor, Masaaki Shirakawa, said he would delay any substantial monetary easing until 2014. Hold the presses! Prime Minister Shinzo Abe indicated that if the yen fall became too severe, it might have to be slowed. The US government started carping that the weak yen was giving Japan?s car exports an unfair advantage.

That all-electric Nissan Leaf that cost $38,000 in November can now be sold for $31,000, once the recent currency depreciation is factored in. That is a big difference, and was a cause of frequent trade wars in decades past. How do you think we ended up with a Corolla factory in Fremont, California?

There is something much more fundamental afoot. Japan has been far and away the world?s largest international direct investor for the last 20 years. Trillions of dollars have poured out of the country, snapping up energy resources, commodities, manufacturing facilities, commercial real estate, and yes, lots of golf courses.

When the interest and dividends thrown off by these holdings were brought back to Japan, dollars were sold and yen bought, some $100 billion worth a year. On top of this, you can add $40 billion in interest payments earned on $800 billion in US Treasury bonds held by the Japanese government. Total it all up, and it is not only enough to support the yen, but to send it to new highs continuously for the past two decades, no matter how dire the worsening fundamentals of the domestic Japanese economy.

So what happens next? Think of the Nissan Leaf trade in reverse. That American factory that cost $1 billion in 2012 will now set a Japanese investor back $1.2 billion. Ditto for the government?s purchase of US Treasuries. The Japanese won?t stop their foreign investment completely, but they are now being priced out of the market in many transactions, and it will slow appreciably. So does that repatriated interest and dividends. This will feed into a weaker yen over the long term.

Given more time, Japan?s other awful fundamentals will start to kick in as well. Those include a deplorable demographic outlook, a debt/GDP ratio of 240%, the hollowing out of Japanese industry as it decamped for China, and the new cold war with the Middle Kingdom.

I?ll tell you how recent developments will end. Prime Minister Abe will fire the BOJ governor Shirakawa or he will wait a couple of months for him to retire. That will be consistent with his pedal to the metal strategy for reviving the Japanese economy. Then, the aggressive monetary easing he campaigned and won the election on, will get moved from 2014 back up to 2013--early 2013. Like, tomorrow. Then it will be back to free-fall for the yen.

Use this temporary and long overdue weakness to add short positions in the Japanese yen. You can also pick up more of the short yen ETF here, the (YCS).

Take Away the Meatball and What Are You Left With?

The Debt Ceiling Crisis is Cancelled

Diary, Newsletter

I am sitting here in front of a crackling hot fire at my lakeshore estate in Nevada?s Incline Village. It is a brilliantly clear day, with mallard ducks skimming the surface of Lake Tahoe, and the Canadian geese flying in formation overhead. Snow covered Mount Tallac, some 30 miles to the South, looks so close I feel I can almost grab it and take out a bite.

I am on my way to Washington DC for the inauguration, and had the jet touch down in nearby Truckee for a day of reading and rest. My staff greeted me like I was some kind of conquering hero. One of the perks of working for me is that they get a free subscription to my newsletter, and they all invest their 401k?s, IRA,?s pensions, and profit sharing plans accordingly. When they?re doing well, I feel it. My performance shows in those little chocolate truffles that get placed on my pillow at night.

In fact, it has been the hottest start to a year for me in a long time. The model- trading portfolio is up 8% so far in 2013, which is more than half of what I made during all of last year. With the way my positions are currently structured, I stand to make an additional 50 basis points a day until the next options expiration on February 15. All the market has to do until then is to trade up, sideways, or down small,and I get to keep it all. Right now, that is looking like a pretty good bet.

I completely nailed everything. On day one, I went aggressively long the S&P 500 (SPY) and the Russell 2000 (IWM). I averaged up with more equity positions, a financial, American Insurance Group (AIG), and copper producer Freeport McMoRan (FCX) as a China play. Sensing that it was pedal to the metal for a falling yen (FXY), (YCS), I put a major chink of the portfolio into a short position there. In effect, I am long US equities in Japanese yen.

On top of that, I have a massively short volatility position embedded in all of this, not a bad thing to have when the Volatility Index (VIX) is plumbing new six year lows at the 12% handle. Since then, the data has been released showing that the biggest cash flows into equity mutual in a decade came hot on the heels of my Trade Alerts. Things only went awry with Apple (AAPL), which continued to weaken beyond all belief, as if to prove that I was only human.

It looks like my numbers are going to get a further boost this week from no less a fan than the Republican Party. Former vice presidential candidate, Paul Ryan, from Wisconsin, has indicated that the coming debt ceiling crisis, due on March 31, will be postponed for three months.

Having covered Washington politics for 40 years, I can tell you that he is speaking in code. For ?postponed?, read ?cancelled?. I think they figured out it was a lame idea anyway. Certainly, the markets came to the conclusion two months ago that all of these media constructed ?crises? were a bunch of baloney. That is why I have been pounding the table with readers to pile on the long positions, and ?go commando? on their short positions. Risk markets can only go ballistic in response to this ?aha? moment.

All of this encourages me to stick with the strategy outlined in my 2013 Annual Asset Class Review (click here). Look for a hot first quarter, to be followed by two scary ones, and then a strong finish. This means that all good things will be coming to an end in the not too distant future. In fact, we have probably already started some sort of topping process in the markets that will take a couple of months to unfold. Then look out below.

I just got a call from the airport that the flight plan has been filed, clearance obtained, and the jet is fueled up. Got to go.

Life is good.

Nice Long!

Nice Short!

Party Pooper!

Life is Good!

The Fed Says No QE3

Newsletter

As I expected, the wildly optimistic expectations for further quantitative easing by the Federal Reserve at yesterday?s Open Market Committee meeting were not matched with substance. All we got was a continuation of existing modest programs and some minor tweaking of language.

Bernanke only managed to say that, ?further stimulus will be provided as needed.? The Fed left unchanged its statement that economic conditions would likely warrant holding the benchmark Fed funds rate near zero ?at least through late 2014.? It also said it would continue swapping $667 billion of short-term debt with longer-term securities to lengthen the average maturity of its holdings, an action intended to lower long-term interest rates known as Operation Twist.

Apparently, the slowdown in GDP growth from 2% in Q1 to 1.5% in Q2 was not enough to spur the Fed to action. Nor was a slowdown in jobs growth from an average 226,000 jobs per month to 75,000. The earliest the Fed can now take further accommodative action is at their next meeting on September 12-13, just seven weeks before the presidential election.

The dollar rose smartly against the yen and the Euro. Equities closed at their lows for the day. They could have fallen dramatically further. But I think that traders are holding fire until their learn the results of the ECB meeting on Thursday. If we get more rhetoric instead of action, and the Friday nonfarm payroll continues weak, then we will have a hat trick of disappointments that could trigger a more gut wrench plunge in the indexes going into next week.

At the very least, we should challenge the bottom the of recent upward channel, taking us down 50 points from here. That should double the value of my existing position in the (SPY) puts.

Ben, Where Were You?

How the Fed Will Trigger the Next Crash

Newsletter

Over the last two months, I have witnessed one of the least convincing rallies in the US stock market in recent memory. Looking at the chart for the S&P 500 below you can clearly see a modest, low conviction, declining volume rally in an ever-narrowing channel. This is further confirmed by the chart of the NYSE advance/decline ratio that is failing at the March support level, which has now become resistance.

Look at any other asset class and it is flashing warning lights. Ten year Treasury bonds are within a hair?s breadth of blasting through to an all time low yield below 1.42%. We all know from hard earned experience that stocks and bonds never go up together for more than short periods, and that it is almost always the debt markets that get the longer-term trend right.

That flight to safety currency, the Japanese yen, is also screaming at us that trouble is just around the corner. It made it to the ? 77 handle, or over $125.00 in the (FXY) in recent days. People are certainly not buying the Japanese currency because they like Japan?s long-term fundamentals and demographics, which are the worst in the world. Nor are they buying for the yield, which is zero.

It appears that stocks have rallied because traders believe that the Federal Reserve will launch QE3 at its upcoming August 1 meeting. Bonds have been rallying because they think it won?t. Only one of these markets is right. That means the Fed won?t be able to take further easing action until early next year, well after the presidential election. By then, it will have every reason in the world to launch QE3, with the ?fiscal cliff? at the top of the list. That?s why Ben Bernanke is not inclined to waste ammo now.

In the meantime, The US, China, and Japan are all slowing and Europe is falling off a cliff. I was speaking to a hedge fund friend of mine this morning who told me the German paper he read said that they were abandoning Greece. I replied, ?That?s funny, the German paper I read said that they were abandoning Spain.? What ECB rescue funds that are in place are being challenged in the German Supreme Court, creating further uncertainty.

Travel around European main streets, as I have done for the last 10 days, and the ?FOR SALE? signs are everywhere. These are not a signal that I should rush out and buy equities right now, no matter how high the dividends are. They will be higher still, later.

All of this is setting up for an August that could be grizzly. A Fed disappointment will lead to a rapid unwind of the recent stock market rally, and could take us down to the 2012 low at 1,266 pronto, or more. A pop to a 1.25% yield in the ten-year Treasury is a chip shot.

Sign of the August to Come?

My Tactical View of the Market

Newsletter

The easy money has been made on the short side this year for a whole range of asset classes. While we will probably see lower lows from here, the risk/reward ratio for taking short positions in (SPX), (IWM), (FXE), (FXY), (GLD), (SLV), (USO), and (CU) are less favorable than they were two months ago.

Of course, the ultimate arbiter will be the news play and the economic data releases. It they continue to worsen as they have done, you can expect a brief rally in the (SPX) up to the 1,340-1,360 range before the downtrend resumes. First, we will revisit the old low for the move at 1,290. Then 1,250 cries out for attention, which would leave us dead unchanged on the year. Lining up next in the sites is 1,200. But to get that low, probably by August, we would need to see something dramatic out of Europe, which we may well get. For the Russell 2000, look to sell it at the old support range of $78-80, which now becomes overhead resistance, to target $72 on the downside.

Don?t underestimate the devastating impact the Facebook (FB) debacle will have on the overall market. Retail investors lost $6 billion on the deal after institutional investors were given the heads up on the impending disaster and stayed away in droves. The media has plenty of blood on its hands on this one. The day before the pricing, one noted Cable TV network reported that the deal was oversubscribed in Asia by 30:1. Morgan Stanley reached for the extra dollars, increasing the size, and boosting the price by 15%. It all came to tears.

Expect investigations, subpoenas, congressional hearings, prosecutions, multi million out of court settlements, thousands of lawsuits, and many careers ended ?to spend more time with families.? Horrible thought of the day: Apply Apple?s (AAPL) 8X multiple, which is growing at 100% a year, to Facebook, which is not, and you get a (FB) share price of $5. None of this exactly inspires confidence in the stock market.

Notice that emerging markets have really been sucking hind teat this year, dragged down by falling commodity prices, a slowing China, and a general ?RISK OFF? mood. This is probably the first sector you want to go back in at the summer bottom to take advantages of their higher upside betas.

The Euro went through the old 2012 low at $1.260 like a hot knife through butter. On the breach, a lot of momentum programs automatically kicked in and doubled up their short positions. That is what has taken us all the way down to the high $124 handle in the cash. Let?s see how the market digests this breakdown. The commitment of traders report out on Friday should be exciting, as we already have all-time highs in short positions in the beleaguered European currency.

The problem is that any good news whispers or accidental tweets on the sovereign debt crisis could trigger ferocious short covering and gap openings which the continental traders will get a head start on. So again, this is not the low risk trade that it was months ago.

Still, the 2010 lows at $1.18 are now on the menu. I would sell all the ?good news? rallies from here two cents higher. Aggressive traders might consider selling penny rallies, like the one we got today. Notice that the Euro is rallying into the US close every day. This is caused by American traders covering shorts, not wishing to run them into any overnight surprises.

The Japanese yen seems to be stagnating here once again, now that the Bank of Japan has passed on another opportunity to exercise more much needed quantitative easing. Therefore, I will use the next dip to get out of my September put options at a small loss. There is a better use of capital and bigger fish to fry these days.

The Australian dollar has been far and away the world?s worst major currency this year, falling from $110 all the way down to $94 on a spike. It now languishes at $97. I long ago stopped singing ?Waltzing Matilda? in the shower. I hope all my Ausie friends took my advice at the beginning of the year and paid for their European and American vacations while their currency was still dear. We could see as low as $90 in the months to come.

Gold (GLD) and silver (SLV) still look week, as this week?s failed rally attests. The strength of the Indian rupee still has the barbarous relic high priced for the world?s largest buyer, and this will continue to weigh on dollar based owners. But we are also reaching the tag ends of this move down from $1,922. Speculative short positions are at a multi-year low. It would take something pretty dramatic to get me to sell short gold again. For the time being, I am targeting gold at $1,500 on the downside, $1,450 in an extreme case, and $25 in silver.

We are well into the move south for oil, which peaked just at the March 1 Iranian elections just short of $110/barrel. The market now seems to be targeting $87 for the short term. The global economic slowdown is the clear culprit here. But in the US, we are starting to see a clear drag on oil prices caused by the insanely low price of natural gas. You can see this clearly on the charts below where gas has been rising while Texas tea has been plunging. Utilities and industry are switching over to the cleaner burning ultra cheap fuel source as fast as they can. As a result, greenhouse gas emissions are falling faster in the US than any other developed country, according to the Paris based International Energy Agency. Sell any $4 rally in crude and keep a tight stop.

When China catches cold, copper gets pneumonia. So does Australia (FXA), (EWA), for that matter. The China slowdown will most likely continue on into the summer, knocking the wind out of the red metal. If copper manages to rally back up to $3.60, grab it with both hands and throw it out the window. Cover when you hear a loud splat. That works out to about $26.50 in the ETF (CU).

It all points to a highly choppy and volatile ?RISK ON? rally that could last a week or two. It will be a time when you wish you took your mother in law?s advice to get a real job by becoming a cardiologist or plastic surgeon. Do you want to know when I want to reestablish my shorts? If you get a modestly positive nonfarm payroll on at 8:30 am on Friday, June 1, that could deliver a nice two day rally that would be ideal to sell into.

Double Dipping on the Yen

Newsletter

You know how I love second helpings, especially when the sushi bar is involved. I especially like unagi, or cooked eel, which is said to be an oriental aphrodisiac.

I am going to take advantage of Japan?s fiscal year end book closing on March 30 to reenter my short position of the Japanese yen. This is the one time a year when Japanese corporations suddenly repatriate yen back to Japan to beef up the cash on their books for their annual reports. Every year, this creates a quick boost to the yen against the US dollar which fades away in the following weeks like so much smoke.

Like everything else this year, the yen has had a straight line move since I put out my last call to sell the yen at the end of January. So while I made a nice profit on the first trade, I was never given another chance to reenter on the way down. Now I have that opportunity.

Since the yen bottomed on March 21, it has given back 25% of the move. Sure, I would prefer to get back in on the traditional one third pull back. But there are so few attractive trading opportunities out there right now that I am happy to jump the gun. If the yen strengthens more from here I will simply double up the position. This is a trade that I?ll be happy to live with for a while.

I have hammered away at the structural weakness of the Japanese economy ad nauseum for the past year. The one liner is that buyers of the country?s 1% yielding ten year bonds are dying off in droves, it has the world?s worst debt to GDP ratio, and labors under an Armageddon like demographic burden. It doesn?t help that they haven?t invested anything new since Godzilla ate the big screen. Sony (SNE) should have become Apple (AAPL). For those who wish to undertake a refresher course, please read the research pieces listed below:

* ?Momentum is Building for the Yen Shorts? on March 26 at http://madhedgefundradio.com/momentum-is-building-for-the-yen-shorts/

*? ?Nikkei Shows the Yen Move is Real? on February 20 at http://madhedgefundradio.com/nikkei-shows-the-yen-move-is-real/

*? ?Global Trading Dispatch Hits 64%, 11 Day Home Run on Yen Short? on February 13 at
http://madhedgefundradio.com/global-trading-dispatch-hits-64-11-day-home-run-on-yen-short/

*? ?Rumblings in Tokyo? on February 5 at http://madhedgefundradio.com/rumblings-in-tokyo/

*? ?Is This the Chink in Japan?s Armor?? on January 29 at http://madhedgefundradio.com/is-this-the-chink-in-japans-armor/

My preferred instrument here is the Currency Shares Japanese Yen Trust ETF (FXY) , where I will be buying the June, 2012 puts. At the very least, the (FXY) should make it back down to $117 in the near future, a price we visited just a week ago, which should give you a quickie 70%? return on the June $120 puts.

For those who are unwilling or unable to play in the options space, you can invest in the ProShares Ultra Yen Short ETF (YCS), a 2X leveraged bet that the yen falls against the dollar.

Do I hear Any Bids?

Japan?s Last Good Invention

Momentum is Building for the Yen Shorts.

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I?m hearing from my buddies in Japan that while things are already quite bad in that enchanting country, they are about to get a whole lot worse, and that it is time to start scaling into a major short in the yen. Australia and China have already raised interest rates, to be followed by the US, and eventually Europe.

With its economy enfeebled, the prospects of Japan raising rates substantially are close to nil, meaning the yield spread between the yen and other currencies is about to widen big time. In the case of the Australian dollar, that works out to 4% per annum. Leverage up ten to one, and pile on anticipated capital gains brought in by a weakening yen, and you have a real carry trade on your hands. This will generate hundreds of billions of dollars? worth of cascading yen selling as hedge funds dog pile in. It?s macro investing at its finest.

Until now, the government has been able to finance ballooning budget deficits caused by two lost decades, but those days are coming to an end. Japan is quite literally running out of savers. The savings rate has dropped from 20% during my time there, to a spendthrift 3%, because real falling standards of living leave a lot less money for the piggy bank.
The national debt has rocketed to over 200% of GDP, and 100% when you net out government agencies buying each other?s securities. Japan has the world?s worst demographic outlook. Unfunded pension liabilities are exploding. Other than once great cars and video games, what does Japan really have to offer the world these days, but a carry currency?

Until now, the government has been able to cover up these problems with tatami mats, because almost all of the debt it issued has been sold to domestic institutions. Now that this pool is drying up, there is nowhere else to go but foreign investors. With Greece and the rest of the PIIGS at the forefront, and awareness of sovereign risks heightening, this is going to be a much more discerning lot to deal with.

That great bell weather of global risk taking, the Euro/Yen cross is telling us that the mother of all carry trades has already started. You also see this in the Ausie/Yen cross, and outright yen markets. I have scored one round trip in the yen this year and hope to do several more.

You could dip your toe in the water here around ?82.40. In a perfect world you could sell it at the next stop at the ?85 level. My initial downside target is ?90, and after that ?100. If you?re not set up to trade in the futures or the interbank market like the big hedge funds, then take a look at the leveraged short yen ETF, the (YCS) or buying puts on the (FXY). This is a home run if you can get in at the right price.

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