Monday, 22 December 2008

Japanese exports collapse

Here's why the Yen is unsustainable under 100.00:

TOKYO, Dec 22 (Reuters) - Japan's exports plunged at a record annual pace in November with shipments to Asia dropping the most since 1986 as a global economic slump and a surging yen slashed demand for everything from autos to electronics.

While imports fell 14.4 percent as the Japanese economy languished in recession, the 26.7 percent plunge in exports was large enough to keep the trade balance in deficit for a second month running. Japan last logged trade deficits two months in a row during a previous spell of yen strength in 1980.

The Japanese currency has surged around 20 percent against the dollar this year as investors spooked by the global financial crisis bailed out of risky assets and brought funds home. Shipments to the United States sank a record 33.8 percent on slack demand for automobiles. The United States is in recession and American demand for Japanese goods has been falling for 15 months, ever since U.S. mortgage defaults started to squeeze global credit markets.

By contrast Asian markets held up for much of the crisis, but are now crumbling at dizzying speed. Exports to Asia fell 26.7 percent in November. Shipments to China dropped 24.5 percent, the biggest fall since 1995, on weak demand for semiconductors, digital cameras and other electronic goods, the Ministry of Finance said. "The drop shows that domestic demand in China for Japanese goods is not that strong," said Kaori Yamato, an economist at Mizuho Research Institute.

The Chinese economy is slowing sharply as exports to Europe and the United States plunge. Collapsing export markets have slashed Japan's once politically sensitive trade surplus. The trade deficit of 223.4 billion yen ($2.50 billion) in November was smaller than a median market forecast of 257.5 billion yen. "Exports will probably be weak at least until the end of this fiscal year," said Maiko Noguchi, senior economist at Daiwa Securities SMBC. "After that there will be some help from fiscal spending (by other countries) but it's still not clear the economy could recover sustainably."

The Japanese government grew more pessimistic about the economy for the third straight month, citing rapidly falling output and corporate profits in its economic report for December. "Economic conditions are worsening," the government said in the report. It was the first time the government used that expression since February 2002. The deepening economic gloom at home and abroad is forcing Japanese companies such as carmakers Toyota and Honda to slash output and profit forecasts.

A Ministry of Finance survey showed earlier this month that Japanese corporate profits in July-September fell at the sharpest pace in 6-½ years. A Reuters poll showed on Monday the mood among Japanese manufacturers at an all-time low and deteriorating at the fastest pace on record in December.

Honda not happy with strong Yen

TOKYO, Dec 19 (Reuters) - The head of Honda Motor Co warned the strong yen could cripple Japanese industry and spur massive layoffs, and said the automaker would be forced to bring more production overseas if the dollar persisted below 100 yen.

"If the government is saying, 'We don't care about the export industry', then that's fine -- we'll act accordingly," Chief Executive Takeo Fukui told a small group of reporters in an interview on Friday.

Honda, Japan's No.2 automaker, this week slashed its operating profit forecast by two-thirds to 180 billion yen ($2 billion) for the business year to March 31, dragged down by an estimated currency loss of twice that amount.

Expressing frustration with Japanese authorities' slowness to act, Fukui said Honda had set long-term business plans at what was until recently a cautious assumption of a 100-yen dollar, and that any level below that would necessitate a fundamental rethink of the way the company operates.

"If we go beyond (100 yen), we would simply have to transfer more production overseas, cut more temporary workers and even start laying off permanent jobs," he said.

"Beyond that we could switch to importing more cars into Japan, bring research and development facilities overseas, and in an extreme scenario move our headquarters offshore. It would cause nothing short of a hollowing out of Japanese industry."

Under pressure to reverse the dollar's fall and an economy already in recession, the Bank of Japan on Friday cut its key policy rate to 0.10 percent and took other steps aimed at easing corporate credit strains. The dollar budged little, however, briefly falling below pre-announcement levels under 89 yen.


Fukui, who mapped out this week about a dozen steps aimed at saving near-term cash and focusing on core projects, said Honda was determined to meet its new profit forecasts after issuing its third profit warning this week.

"We don't want to revise again no matter what, so we issued our forecasts with that in mind," he said.

Honda changed its dollar-yen assumption for the second half to 95 yen, far more favourable than current levels, but Fukui said the assumption for the final January-March quarter factored in a rate of about 90 yen and presented little risk for now.

He added that the counter-measures announced this week, including delaying the start of a new domestic factory by more than a year, would help lower capital spending "significantly" next year from the 650 billion yen planned this year.

"We'll have to make sure we can secure profits next business year even if the dollar averages 90 yen," Fukui said.

Friday, 19 December 2008

Yen trades

Still in my USD/JPY and NZD/JPY trades.

NZD/JPY looking better, and happy that will work over time, and I will add more to that position eventually.

USD/JPY remains well out of the money, but I made the decision when I opened it up again at 89.63 that I would wait until BoJ acts. That may not be until 85.00 yet, but when they do it will be explosive. I will write my thoughts on the USD/JPY outlook over the next few days.

NZD/USD update

Added a further long 1m NZD short USD at 0.5820.
This coupled with existing long at 0.5515 makes me long NZD2m at an average of 0.5668.

I expected the NZD/USD to rally over Christmas/January, see earlier post for reasons. The weakness in the USD itself is an added bonus. We saw 0.6080 overnight, so this current pull back is a great spot to add some more, which I just did.

I expect a test of 0.6500 in January.

Saturday, 13 December 2008

Excellent Editorial from the New Zealand Herald Today

The Editorial from the Herald is spot on:

Eyebrows were raised this week when the Reserve Bank Governor castigated banks, oil companies and food manufacturers for not bringing down prices as much as they should. In a speech entitled "Everyone needs to play their part," Alan Bollard also told power companies not to keep pushing up prices and chastised local bodies for not keeping rate rises under the level of inflation. It was a sweeping assault aimed specifically at ensuring inflationary pressures continue to be dampened. More broadly, however, it was a welcome marker in a time of extraordinary economic stress.

Some of those criticised by Dr Bollard were quick to fire back. One or two had more reason than others. But the response from the Auckland City Council and the banks suggested that, at least in their cases, the governor's attack had been witheringly accurate. Most lamentably, councillor Doug Armstrong suggested Dr Bollard was wrong because Auckland City had managed to keep its rate rises within the "council rate of inflation". The only problem is that this year's council rate, the basis for rates and water bill increases, is 5.1 per cent. Over the past three years, the official rate of inflation has averaged just 3.2 per cent. As Dr Bollard suggests, councils have got into the habit of passing on big increases and not thinking too deeply about it. It is not, after all, their money.

The banks, also, had no valid comeback to the governor's surprise at not seeing more "pass-through" from the Reserve Bank's slashing of the official cash rate. Short-term mortgage rates have been cut but not by as much as the OCR reductions. The banks, variously, attributed this to the increased cost of borrowing overseas, a wish not to reduce deposit rates by a similar rate, and Government charges for the bank deposit guarantee scheme.

To heap blame on a scheme funded by the taxpayer for the good of the banking sector is ungracious, to say the least. So, too, is the lack of any acknowledgment that banks happily extracted huge profits before the United States sub-prime mortgage crisis bit. According to accounting firm KPMG, the big banks made combined profits of $4.8 billion before tax last year. Dr Bollard says they cannot expect to maintain high profit margins in the current environment. Asking them to come to the party seems particularly reasonable, given the underpinning they have received from the taxpayer.

Other industry sectors have not received such largesse. Some also point to an inherent conflict between Dr Bollard's wish and their responsibilities to their shareholders. But most companies will, in any case, be wary of lifting their prices for fear of losing out to competitors. Those who do and suffer for it will, ultimately, have served their shareholders badly. Dr Bollard has, of course, spent the past few years delivering stern and unpalatable messages. His entreaties to householders about their ongoing spending spree went largely unanswered. So, too, did his message to banks that some of their lending practices were rash. Now, his cutting of the official cash rate seeks to prise open people's chequebooks. There may be difficulties there, too, because many are worried about losing their jobs.

It will take even longer if the councils and companies targeted by Dr Bollard do not pull their weight. He will find it hard to keep cutting interest rates if there is no evidence that inflationary pressures are reducing significantly across the board. If such were the case, a vital stimulus would be lost. That would hinder not only economic recovery but the profitability or performance of each of the enterprises targeted by Dr Bollard. They have a vested interest in playing their part.

They should heed the governor.

USD/JPY Update

Could not resist the USD/JPY move under 90.00 yesterday so bought back USD3m at 89.63 closing out the short at 96.97 (see here for details) to re instate my original position of long USD3m at 103.10.... ouch! So banked a gain but still have an overall unrealised loss.

Will update net positions over the weekend.

Still believe the USD/JPY does not make sense under 110 given the state of the Japanese economy. Buying USD/JPY at close to 13 year lows seems sensible, but admit it hasn't worked so far.

As an aside, what really pisses me off are these comments from Reuters:

"Earlier, the dollar plunged to 88.10 yen , its lowest since mid-1995, after the U.S. Senate rejected a $14 billion auto rescue plan. That heightened recession fears, pushing investors to buy the yen to cover trades that were financed by borrowing the currency at low rates."

That is such a ridiculous comment. Who still has a carry trade in place to repay given the huge falls in the NZD/JPY and AUD/JPY and the JPY generally against the world? The corporates are well hedged and the Japanese housewife just acts on maturity and generally rolls over to keep yield. They certainly don't react to auto bail out failure news.

Sure there are new carry's being placed, but those are generally with intentions of adding on lower levels, not getting out, and waiting for the big retracement/new trend back again.

Who writes this crap?

Thursday, 11 December 2008

Germany tells it straight

LONDON, Dec 10 (Reuters) - German Finance Minister Peer Steinbrueck has criticised countries for rushing through what he called crass and untested economic rescue packages at a "breathtaking and depressing" pace.

In an interview with Newsweek magazine, Steinbrueck urged governments to pause before pledging to spend billions of dollars on plans to try and help their economies emerge from the global credit crunch.

A recession was unavoidable and governments should stop trying to outdo each other with ever bigger stimulus measures, said Steinbrueck.

"The speed at which proposals are put together under pressure that don't even pass an economic test is breathtaking and depressing," he said in the interview, published on the magazine's website on Wednesday.

Steinbrueck singled out British Prime Minister Gordon Brown for particular criticism, accusing him of switching to economic policies that would saddle a generation with debt.

"The same people who would never touch deficit spending are now tossing around billions," he said.

"The switch from decades of supply-side politics all the way to a crass Keynesianism is breathtaking."


German Chancellor Angela Merkel's government has expressed doubts as to whether ever-increasing fiscal boosts are the cure-all solution for every country's economic ills.

"For a while the position in Brussels and a few other places has been, 'We're now very much for setting up large-scale spending programmes, but we're not really going to ask what the exact effects of those might be. And since the amounts are so high, well, let's get the Germans to pay because they can'," said Steinbrueck.

"Ms. Merkel and I are trying to calm them down a bit just now, and understandably that's getting us criticised."

Leaders of Britain, France and the European Commission met in London on Monday to present a united front on a 200 billion euro economic stimulus package for the EU, but Germany was left out of the talks.

European leaders are due to meet in Brussels on Thursday and Friday to discuss the proposal.

Asked what was wrong with stimulus proposals that some countries had already put forward, Steinbrueck was highly critical of Britain's plans to inject record sums of money into its economy.

"Our British friends are now cutting their value added (sales) tax," he said.

"We have no idea how much of that stores will pass on to customers ... All this will do is raise Britain's debt to a level that will take a whole generation to work off."

Keynesianism is based on the theories of British economist John Maynard Keynes, notably the use of government spending and low interest rates to stimulate demand during a recession.

Steinbrueck said people were naturally nervous about the financial crisis but that he wanted to give Germany's own 31 billion euro stimulus package time to succeed.

"As long as we haven't even given that a chance to work, I am not going to participate in this bidding war over who can do the most. I try to exude a little steadiness and continuity instead," he said.

About time someone put the other side to bailouts - KT

Monday, 8 December 2008

USD/JPY update

The USD/JPY is looking somewhat frisky again, but early days yet.

Placed a stop loss order to buy USD 3m sell JPY at 95.50 to unwind my "freeze" trades taken at average of 96.97 and book a small gain. (offset by bigger unrealised losses on original trades of course)

Probably won't get there anytime soon, but best to make sure that I'm back in the game on this trade if we have a serious rally building.

Trading Style

I get asked a lot about my trading style. To be honest I haven’t really set out to develop one specifically at all, but after 30 years trading markets, I have realised a lot of what not to do.

First I tried fundamental trading, poring over statistics, money supply, interest rates unemployment numbers etc etc. When the Berlin wall fell, every economist predicted that unifying East and West Germany would cost billions and take decades. This was bad for the Deutsche Mark, and so on the fundmentals anyway the DEM was a sell. And yet we saw a huge and prolonged rally in the DEM, purely on the exuberance of the reunification of Germany. So fundamentals clearly did not always work, and emotions sometimes do.

Then I switched to charting and did the lot. Point and Figure, Moving averages, Stochastics, Momentum, Elliot wave, Fibonacci, you name it, I tried it. Bought the books, did the studies, bought the models etc etc. Sometimes they worked, sometimes they didn’t. Sometimes the pattern was so clear after the event, and rarely did it repeat.

Then I tried money management, and stop loss orders, take profit levels, risk analysis etc etc. I followed the reasoning that it was better to run your profits and take losses quickly etc etc.

But it was when I was watching really rich people in the markets that I realised the real truth:

It’s best not to care about the trade at all.

I have seen people with bad positions. They don’t panic. They don’t get out. They just wait. If the reason for doing the trade is still valid then they just wait. If the reason is not valid then they get out, whether a profit or a loss is realised or not.

The old adage still works: Money makes money. If you don’t care about it then you are unlikely to panic and get out at the bottom or the top . You just wait.

So I started out with small positions that I could ignore, and built up from there. I realised that all the styles are only tools to help you make a decision, and that it was my own fears that I had to understand really.

My style is to decide a trade and take a position and then just wait. I decide on fundamentals, charts, gut feeling, and a mixture of all the above. But I only get out when it feels wrong, not when some specific chart or fundamental stat starts going the other way. And even then I am reluctant to quit a trade quickly. I have seen people get very rich just by waiting for the cycles to turn again, and they do eventually.

I just wait…and you know, it usually works!

...and in between I watch a lot of cute blondes!!

Some contrarian comment on the USD...which agrees with my views!!

NEW YORK, Dec 4 (Reuters) - The reality of low interest rates and deep economic recession should finally start to catch up with the U.S. dollar in 2009, after risk aversion and de-leveraging helped push the currency to multi-year highs.

The advance -- which has pushed the dollar up almost 20 percent against a basket of six currencies since July -- is "artificial" and may subside once extreme risk aversion eases and global markets stabilize, analysts said.

"Foundations for the dollar's recent rally have not been solid. The result of repatriation, deleveraging, quantitative easing and a major scarcity of dollars," said Bob Sinche, head of global FX and rate strategy at The Bank of America in New York. "But now we are bound for a correction."

Sinche said euro/dollar may be trading at 1.38 by the end of December and that the dollar may rapidly dip to 1.44 to the euro by the first quarter of 2009 before the pair resumes a "more gradual sell-off."

The European currency was last trading in New York at $1.2804 compared with a record high of $1.6038 touched on July 15. Demand for the greenback rose as the financial crisis deepened and even as the Federal Reserve cut interest rates while the economy slowed.

"The dollar was at the receiving end of leverage flows and also concerns about the euro zone's ability to navigate its first systemic crisis," said Daniel Katzive, director for global foreign exchange at Credit Suisse Securities in New York. "But the U.S. currency is no longer very cheap. Actually, in same pairs, the undervaluation of the dollar has been erased remarkably quickly."

Goldman Sachs' senior investment strategist Abby Joseph Cohen also said on Thursday the U.S. dollar now is about at the level "it should be."

Katzive at Credit Suisse added it may be premature to call the end of de-leveraging and that price action in euro/dollar may be choppy until the end of the year.

However, he said extreme risk aversion is beginning to show signs of easing. And that combined with lower rates and a weak economy, this should start to add pressure on the dollar. The bank forecasts euro/dollar to trade as low as 1.23 in the near term but rebounding to 1.37 in about six months.

In a sign risk may be easing, most currency strategists in a Reuters poll released on Wednesday said they expect volatility in the euro, sterling and yen against the dollar to decrease in the next few weeks.

The poll implied monthly annualized volatility of 14.8 percent for the euro against the dollar in December, down from the 23.6 percent seen in November.

"If the equity markets manage to hold on to some of its gains, with some relaxation in risk aversion, we may see a pullback in euro/dollar," said Tom Fitzpatrick, chief technical analyst at Citigroup in New York. "Some weakening in the dollar is not inconceivable."

Still, for many analysts, the outlook for the dollar in the next couple of months will depend greatly on the impact that lower benchmark interest rates across the globe will have on multiple currencies.

Most major central banks have been cutting benchmark rates, aggressively trying to revive local financial markets and economies since the global financial crisis deepened in September.

This week alone, the European Central Bank, the Bank of England, Sweden's Riksbank and the Reserve Bank of New Zealand all matched or exceeded easing expectations at rate-setting meetings.

Earlier on Thursday the ECB cut interest rates by 75 basis points in its biggest move ever. Its main refinancing rate now stands at 2.50 percent, the lowest in nearly 2-1/2 years, but more than double the U.S. Federal Reserve's benchmark rate at 1 percent.

But while some analysts like Katzive at Credit Suisse expect interest rate differentials to gradually weigh on the dollar in 2009, others argue a correction won't be immediate.

"Global yield differentials are collapsing and it is perhaps just a few months before rates in the eurozone and the UK fall very close to the US rates," said Vassili Serebriakov, a senior currency strategist at Wells Fargo Bank in New York.

"But while rate convergence could remove some of the recent support for the dollar, once financial conditions stabilize and risk appetite returns, the yield attraction of currencies such as the pound and the euro over the dollar is likely to have disappeared," he added.

Wells Fargo forecasts euro/dollar will be trading at 1.26 in six months and at 1.28 in one year.

I have a lot of time for Abby Joseph Cohen -- KT

Wednesday, 3 December 2008


Added another trade:

Bought NZD 1m Sold Yen at 49.25, thus making position long NZD2m at average of 54.54.
Review level 41.87, being long term lows.

USD/JPY deals still in the deep freeze!

Tuesday, 2 December 2008

Interesting article on intervention in the Yen

TOKYO, Dec 2 (Reuters) - Nearly half of major Japanese firms want authorities to intervene to prevent the yen from rising beyond 90 yen to the dollar, to support Japan's export-driven economy, a Reuters survey showed.

The yen hit a 13-year high of 90.87 yen to the dollar in October, and traders say it may climb past such a level in coming months, as investors continue to shun risky carry trades due to credit market turmoil and fears of a global recession.

"A recovery of the export industry's earnings is important for the Japanese economy at this stage," said a company in the services sector.

Japan slid into its first recession in seven years in the third quarter as exports crumbled.

Exporters have been the main engine of growth for Japan's economy, but data released last week showed that manufacturers have forecast their biggest ever quarterly fall in output in the fourth quarter, fuelling worries of a deep recession.

The yen's historic jump in October was partly due to the unwinding of carry trades, in which investors sell low-yielding currencies like the yen to fund investment in higher-yielding currencies and assets.

Asked whether they wanted currency intervention to prevent the dollar from falling below 90 yen, 97 out of 213 major firms that responded, or 46 percent, said they hoped for such action from Japanese authorities.

Sixteen percent, or 34 respondents, said they did not want intervention while 39 percent, or 82 respondents, said they did not have a preferance.

In a separate query on the chances of yen-selling action by Japanese authorities, 65 percent of respondents said they thought Japan would intervene if the dollar fell to 90 yen or below, while 35 percent said they were not expecting any intervention.

Among companies that expect such intervention, 44 percent said they thought there would be intervention if the dollar falls below 90 yen, 29 percent said a dollar slide below 87.50 yen would trigger such action, and the remaining 27 percent thought Japan would wait until the dollar falls below 85 yen.

Some respondents said currency moves should generally be left to market forces, but added that intervention may be needed to curb sharp fluctuations.

"Trying to avert sharp swings may be necessary, but it would be better to avoid intervention if possible," said a company in the oil, coal and ceramics industry.

Others were sceptical that solo intervention by Japanese authorities would be effective, and some questioned whether foreign exchange intervention was the right response to the turmoil in markets and the global economy.

But a transportation machinery maker, which said it wanted authorities to intervene to prevent the dollar from falling below 90 yen, added that the biggest worry was how long the adverse economic conditions stemming from the financial crisis would last.

"Once we escape this situation, foreign exchange conditions are likely to return to natural levels. In other words, the concern here is the time required to shake free from this situation, and this is not an issue that can be resolved through foreign exchange intervention," the company said.

Japan has stayed out the market for more than four years, the longest such stretch in Ministry of Finance data going back to 1991.

Japan sold 35 trillion yen in the 15 months to March 2004 on concerns that excessive yen strength could dampen overseas demand for Japanese exports and hurt the economy.

As I have said before, below 90.00 and the BOJ will act. KT