Japan and USDJPY - make or break?

March is always key month for companies in Japan – it marks the end of the financial report season (April 1^st – March 31^st) but this year is more important than normal due to three major factors:

 

#1: The VAT hike on April 1^st from 5% to 8% is making the Japanese the most pessimistic on the future relative the present conditions. Actually is beyond any norm we have seen:

 

 

Of course this looks to be a mean-reverting process which would indicate that the Japanese are too concerned about the VAT hike and its impact. An alternative interpretation being that the individual investor/Consumer actually knows better and reacts not to the monetary experiment of the BOJ and the government but to the reality of knowing spending money you don't have and printing money you don't have collateral for is a short-cut, but to ruin. Maybe the Japanese have seen this before?

 

# 2: Nikkei and TOPIX no longer outperforms, so even international investors is about to lose faith or?  This chart inspired by Barclay's research shows ratio of TOPIX to S and P. The normalization is always done…

 

 

 

#3: USDJPY is failing to make new highs – if anything we probably have seen this year hig, and USDJPY remains the biggest conviction trade among speculators and investors alike. I am yet to meet strategist or hedge fund manager who does not believe USDJPY is destined for 110+ ….minimum…. but…..looks at these two charts:

 

 

This shows a momemtum based model – its becoming "significant" meaning the best way to trade this is between… 70 and 30 (selling when 70 is broken and buying when 30 is pierced from below)….

 

Furthermore our forward looking model JABA have this to say – top is in… correction will 15 figures plus/minus

 

 

Finally, note this: 100 SMA – simple moving average – is used by Japanese hedgers almost exclusively to trade JPY instruments. 100 days equals three month and that's the average hedging program, meaning that the present 102.35 moving average vs. a spot of 101.50 means Japanese hedgers will need to sell more as we go down in order to be fully hedged. This being said: commercial flow remains small relative to the speculative, so far more important is the key support levels. My take is that 101.00 needs to hold.. if broken we are on route to first 96.00 then ultimate low 90s….

 

Whether is make or break I cant honest predict, but I would argue that the "non-miracle" of Japan called Abenomics is about to be exposed ……..

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

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