Thoughts on trading and the Yen.

OK, some thoughts on my trading generally and the USD/JPY.

I am long 3m USD against the Yen again, after taking positions at 103.10 and then taking counter trades (freeze trades see here) at 96.97, which I then closed out at 89.63.

Taking a profit of USD245,676.67 (@0.5800 NZD423,580.47) and leaving an unrealized loss of USD410,143.33, NZD703,504.85, at current rates of 90.70 and 0.5830. Net unrealised loss at present therefore NZD279,924.38.

But first some stuff on trading style.

I take long-term currency positions on a whole raft of factors. It is a little bit like Lonely Traders Knotty Warhol stance, see here. But he is much more detailed and technical than me. If asked I can’t really point to why I like a trade, it is really a whole range of factors, of which sometimes none of them stack up on their own.

But after more than 30 years in the markets I take great care not to get fixed on one school of thought. If I have learnt anything, it is that once I have worked out what is driving the markets, it isn’t happening anymore because others have worked it out too, and the drivers have therefore changed as a result.

So I keep shifting what matters to me, and I don’t get too hung up on any one thing, be it technicals or levels or even fundamentals, it is really a cooking pot of ideas and out of that I get a “sense” of what to do. My view if you like. I read a great deal, many newspapers, magazines, blogs, websites and my “world view” is something I tend 24/7 with great passion.

It drives my trading and it also drives my advice to my private client base. I guess I can sweep a lot of articles, given that I could actually write some of them. I guess that is why I dislike many articles out there as rubbish.

But this blog was never about giving advice to anyone. It is all about making me write stuff about my views to sort out my own mind. I really don’t care if no one reads it or many do. I rarely react to other market views, but they do go into the pot and sometimes may colour the thought process.

I am not interested in what is going on right now. That is the bulk of commentaries. I am interested in what is going to happen next, which is much harder to do, with any commentaries on that non-existent. After all, if you could do that regularly, why work anywhere, and even less, why tell anyone?

My track record over many years has been a good one. But again I don’t feel the need to justify myself…I ain’t selling anything! On this blog I have traced just the last years trading, as it has happened, and you can follow all the posts if you want or if you care, I’m not fussed either way. I rarely make a long-term loss, although I can be and have been in the crap for some months at a time over the years. Strong capital base is key!

In the past I have traded all time frames and hate day trading, although I was a currency spot trader at a bank once, didn't like it, with my style much more comfortable with long term strategic positions taken over weeks and months. This means that fundamentals will always have a higher weighting in my thinking. I generally (but not always, see rule above) have a dim view of charts as most chartists that I have met over many years have crashed and burned eventually and gone back to working for someone somewhere or left the markets entirely.

So that means that any charts used will be dailies or weeklies, and maybe an hourly to finesse adding to a position. But my basic stance is if you have decided to take a trade, and are looking for 10 cent moves then the level on the day is really small beer.

So I always take a long, long, long term view.

Anyway the Yen, and sorry if this is generalised, but I’m just not going to write a book or do detailed analysis, you can easily find that elsewhere.

Before….
In the past the Yen has generally traded strong when Japan is in recession because their exporters do so well. The golden rule has been that China and Japan make it, and the US consumer buys it. This drives demand for Yen.

They don’t import much during a recession because domestic demand is weak and so the trade flows favour a strong Yen because there are more buyers than sellers of Yen due to the trade surpluses. The capital markets tend to weaken the Yen as funds flow out, but even that has not been a given, as foreign funds have bought into Japan and these can offset the outflows on Uridashis, and the carry trades.

But over time the carry trades became huge and I was caught in the wave of repayments as these trades reversed, hence my “lock up” between 96.97 and 89.63.

Now….
Japan is in a recession, but the key difference is that so is the rest of the world, with the US consumer, the main proxy buyer of Yen absolutely stuffed, both from an asset (property and shares) and credit (ability to borrow) perspective.

I believe that the capital markets are stuffed as well, with raising funds in Yen and buying international assets much more difficult to do, and the major players, the investment banks, are either gone or shadows of their former selves. Japan Inc is the only player left.

I am comfortable at being long USD/JPY again because I think that with the US and the world slowing, the demand for Japanese (and Chinese, which sources stuff from Japan) goods globally will be abysmal and will take years to pick up to where they were, if they ever do.

If you scroll back some posts you will see the disastrous affects that the strong Yen is having on Japanese industry, with Japan now running trade deficits for the first time in many years, and production collapsing.

So with sellers of Yen outweighing buyers on the trade front, and the bulk of the carry trades repaid (buyers of Yen), what happens if funds full of cash step out from Japan again seeking a higher global yield?

The Yen must weaken.

Two more factors.

Firstly Japan Inc can buy stuff cheaply. With record lows in global shares and a strong Yen, they can buy market share at a fraction of the prices 12 months ago. Once they see that markets are stabilising (have a look at the TED spread and the VIX), then they will venture out of the fox hole again. Japan Inc are probably the only players who can actually borrow Yen in size now anyway.

Secondly the Bank of Japan. They are under huge pressure. To lower interest rates. To lend to their under pressure corporates. To weaken the Yen by intervention. To do some and all the above… and they are, with heavy pressure coming from the Finance Ministry.

The Yen will weaken in the months ahead, with my initial levels 96.00, 101.70 and then key at 104 enroute to the 120.00 area.

Then it will be overdone!

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.

NO MORE REVISIONS

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.

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.

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?