8/7/2019 Short JPY

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NickBucheleres

ShortJapaneseYen(JPY)

April7,2011Likeeverynewsanchorandinterviewedblue-chipCEO,Iwillstartthispitchoffwithahallow,lamentinghopeforJapanspromptrecoveryfromtheearthquakethattheyincurredonMarch11th.Iwillalsopledgeenduringmoralsupportforthemintheirtimeofneed.Inthemeantime,

though,Iwillhighlightwaysinwhichinvestorscan(andwill)takeadvantageofthenaturaldisasterthatshooktheworldssecondlargesteconomyjustafewweeksback.Followingthe9.0magnitudeinitialshockthatrockedJapanamonthago,andtherecentsubsequent7.1magnitudeaftershock,Japanhastakenseveralmeasuresinattemptstosequesteraconfidentandspeedyrebuildingoftheislandcountryandrecoveryoftheirfinancialmarkets--bothofwhichwerebadlyhitbythedisaster.JapaneseEquities

Aboveisa2-yearchartof(fromtopdown)theDowJonesIndustrialAverage,theJapaneseNikkei225Average,andToyotaMotors(TM).Sharpsell-offsforallthreeofthembeganonMarch11thastheearthquakebegantolayintoJapan.TheDJIAfellonlyslightly,whileJapanesemarketsretractedtopreviousmajorpricesbases.

AreportfromCNNquantifiedtheimpactoftheearthquakeonJapaneseautosalesandtheeconomyasawhole:NewvehiclesaleswithintheEastAsiannationplunged37percentinMarch,comparedtodatafromthesamemonthoneyearago,accordingtodatafromJapan'sAutoDealerAssociation.That'sthelargestsalesdropinMarchsincetheindustrytradegroupbegancollectingdatabackin1968.Toyotawashitthehardest,showinga46%dropinsales--adecreasethatdidnotincludeitsluxuryLexusbrand.Nissansalesskidded38%,whileHondasawitsfiguresslashedbymorethanaquarterat28%.

8/7/2019 Short JPY

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Safe-HavenFlight

BeginningonMarch11th,hoardsofinternationalcurrencyflowedintothetraditionalsafe-havenassetthatistheJapaneseyen.Investorstypicallypourintothecurrencyintimesofuncertainty,asitishailedasoneoftheworldssafestinvestments,duetothecountryseconomicandfiscalsolvency.

TheJPYhasbeenseriouslyappreciatingagainsttheUSDsincetheUSFederalReserveenactedits$600billionstimuluspackageannouncedinthesummerof2010.

Followingthequakewasaswiftappreciationofthesafe-havenJapaneseyenagainsttheUSdollar.

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BankofJapanIntervention

Followingtherapidappreciationofthepost-quakeyen,theBankofJapandecidedtoengageinopenmarketoperationsonMarch14th.OntheMondayaftertheirdevastatingweek,theBoJinjectedmorethan15trillionyen(or$184billion)ofliquidityintotheJapaneseeconomy.TheBankofJapandecidedtotakesuchmeasuresnot(only)duetothefallenJapaneseassetprices,butalsotooffsetthesafe-havencapitalinflowsthatwoulddampentheJapanese

recoveryefforts.Japan,throughmassiveaccumulationofforeignreserves,reliesheavilyonadepreciatedyentofundtheirexport-basedeconomy.AstrongJPYmakesJapaneseexportslessattractive(moreexpensive)toimportersaroundtheworld,andmaintainingtheirdominantinternationalexporterstatusintheworldeconomywillbevitalfortheJapaneseeconomytorecover.Japansdebt/GDP&nationalsavings/GDPratioshaverecentlycrossedintonegativeterritory,sotheBankofJapanmustattempttosalvagewhateverportionoflostgrossdomesticproductthatitcan,orelseitrisksenteringintoinsolventterritory.

TheyencontinuedtoappreciateagainsttheUSDaftertheMarch14thBoJdecisionuntilWednesdaymorning,whentheopenmarketoperationsweresetintoaction.Sincethen,theyensawanimmediatedeprecationagainstcompetingsafe-havenasset,theUSD,andthencontinuedintoasustainedmovementinfavorofJapansintentions.

TheBankofJapansinterventionisnearlyone-thirdofthesizeoftheUnitedStatesequivalent,referredtoasQE2.JapaneseGDP($5trillion)ismorethanone-thirdofthesizeoftheUnitedStatesGDP($14trillion).TheInternationalMonetaryFund(IMF)cutJapans2011growthoutlookfrom1.6%to1.4%.TheIMFalsocuttheUnitedStates2011growthoutlookfrom3%to2.8%,morefavorablethantheiroutlookforJapan.

8/7/2019 Short JPY

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TheGoods

Theabove2-monthchartof(fromtopdown)theEUR/JPY,USD/JPY,andEUR/USD.TheEURadvancedatamarkedlyfasterpacethantheUSDagainsttheJPYfollowingthequake.

TheEURhasbeenappreciatingagainsttheUSDformostof2011duetotheimminentEuropeanratehikesandtheBernankesfirmpositiononnearzerointerestrates.Theeurosstrengthcomesasaresultoftomorrows(April8th)EuropeanCentralBankmeeting,whereECBPresidentJean-ClaudeTrichetwillraiseEuropeanlendingratesforsolventEuropeanUnioncountries,likeGermany,forthefirsttimeinalmostthreeyears.TomorrowsratehikeisexpectedtobethefirstofpossiblythreeEUratehikesbeforeDecember31,2011.

8/7/2019 Short JPY

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LongEUR/JPY

ThisisaplayoffoftheBankofJapanspledgetomaintainadepreciatedyen,inadditiontocapitaloutflowsfromJapaninthewakeoftheearthquake.Theeuro,ontheotherhand,willbenefitfromthecapitalinflowsofrate-hungryinvestors.AnimminentriskforthistradeisthepossibledefaultofEUcountriesGreece,Ireland,andnowPortugal.Theratehike,though,doesnotrepresentincreasedriskinessofholdingEuropeandebt,butratheritisrepresentativeof

inflationconcernsoffofotherthrivingEuro-zonenations.Germanyisexperiencingrecordeconomicgrowthandproduction,andthisgrowthistranslatingintohigherpricesfortherestofEuropeans.Thistradewouldlikelylastuntilmorebearishnewscomesoutoftheeuro-zone.

Theeuroistesting2010highsagainsttheyen.Iftheselevelsarebroken,thepairhasthepotentialtohit$127+inthenear-term.LongUSD/JPY

Againoffofyendepreciation,astrongbetwillbetoselltheyenagainsttheUSdollar.WiththeFedsQE2programcomingtoanendnextmonth,muchoftheweaknessoftheUSDwillbeeliminatedfromnominalprices.ThiswilldissuadeBernankeandtheFederalReservefromraisinginterestrates,astheECBhasdone.RisingUSconsumerandproducerconfidenceispaintingapromisingpicturefortheUSeconomicrecovery,whichwillboostUSGDPandbolsterconfidenceintheUSD.Fornow,JapanandtheJapaneseyenare #losing,andthiswilllikelybethescenarioformonthstocome.Thiscomesduringatimewhenothernations(EU,US,etc.)areexperiencingarecoveryfromthe2009financialcrash,whichwillappreciatethesaidcurrenciesinthefaceofJapansgoaltokeeptheyenaslowasresponsiblypossible.njb