The Case Against the Yen

• Yen rally carries interesting implication

• Kuroda does nothing to slow appreciation

• I have stepped in to fade this strength

• Yen shouldn't be confused with safe havens

WILD PROSPECT - The Yen is on the move again and when you break it down, things could start to get ugly if USDJPY takes out 110.00. Technically, the consolidation in USDJPY over the past several weeks has been classified as a bearish consolidation, with this latest drop potentially opening the next major downside extension targeting a measured move objective at 106.50. It sounds crazy, but it also shouldn't be ruled out.

FAMILIAR CORRELATION - Fundamentally, the Yen continues to correlate with safe haven flow. Any signs of a pullback in risk assets usually translates into Yen demand. And so, with risk coming off into Tuesday, it comes as no surprise to see the Yen bid to fresh multi day highs (USDJPY lows). Moreover, earlier today, BOJ Governor Kuroda did nothing to slow the decline in USDJPY after warning of the limitations of monetary policy.

LONG NZDJPY - And yet, with all of this going on, and despite my very bearish outlook for risk markets, I have stepped in on Tuesday and sold Yen! Am I crazy? Well, yes. But probably for other reasons. With NZDJPY getting hit so hard earlier today, the opportunity was there to take a shot and buy into the extreme weakness. As a short term trade, the opportunity was there and as a medium-trade, it actually also could be attractive.

THESE TWO THINGS - I am only in this thing as a short-term play, but if we break it down, I'm not so sure this correlation between the Yen and risk off continues. It's important to remember two critical facts here. 1) The Yen has never really been a safe haven currency. It has benefitted when risk comes off, but there is nothing about the Yen that is particularly safe (if anything, quite the opposite). 2) Any additional strength in the Yen that takes USDJPY below 110.00, will get officials talking.

DECEPTIVE DISGUISE - As far as point number one goes, the Yen has disguised itself as a safe haven currency only because it shares the lower interest rate qualities of other legitimate safe havens like the US Dollar and the Swiss Franc. The fact that interest rate differentials always favor other currencies relative to the Yen, automatically makes it a currency that benefits when risk unwinds. But it doesn't mean this is something that will persist.

UNHAPPY ADMINISTRATION - There is every possibility, especially in this world of low interest rates across the globe, that the fundamentals supporting a weaker Yen will trump any demand on safe haven flow over the medium-term. This takes us to point number two above which is the fact that the administration in Japan does not want to see the USDJPY rate below 110.00. Any moves below would likely prompt a more aggressive response which should keep the currency from rising too much.

STRATEGY - And so, my strategy going forward will be to continue to look for opportunities to fade this latest Yen strength. I have done so today via the long NZDJPY position. But if this trade doesn't follow through today, I will look to build into a Yen short on any additional Yen strength. For now, let's sit back and see how the rest of Tuesday unfolds. It could be an exciting day. I'll keep you all posted re any other trades that come my way.