He writes, “Clearly, as we approach the holiday period the likelihood is that this issue will be the key driver of sentiment. Still, position squaring as we approach year-end continues to drive prices – the yen is stronger where short positions are at 5-year highs, the Australian & New Zealand dollars are weaker – long Australian dollar has been a popular trade and positioning there is at a record high. Gold fell sharply again yesterday and long gold has been another popular trade during 2012. We certainly understand the reversal of the yen and suspect that there may be further to go given the extent of yen selling looks excessive.”
Halpenny feels that all eyes will remain on Shinzo Abe and the steps he takes in implementing his economic policies expressed during the election campaign. The next opportunity to asses that will come next week when Abe names his cabinet. The media is reporting that Taro Aso (himself an ex-PM too) will be named as Finance Minister. Mr Aso was PM after the collapse of Lehman Brothers and implemented an aggressive JPY 14trn fiscal stimulus package and is therefore viewed as someone who won’t hesitate in implementing another aggressive fiscal stimulus program. However, assuming that fiscal stimulus which lifts economic growth will weaken the yen is questionable indeed. How many fiscal stimulus programs have Japan undergone and how many of those weakened the yen?
Furthermore, Halpenny notes that Abe is expected to appoint an Economy Minister who is sympathetic to re-activating Japan´s nuclear energy sector. He has been vocal on the need for this to happen and a shift in energy policy that reduces Japan’s dependence on imported fossil fuel is certainly not yen negative. Finally Dow Jones today is highlighting the fact that an Aso appointment as Finance Minister would effectively rule out Heizo Takenaka as BOJ Governor given previous clashes between the two. Takenaka would have been the appointment as Governor that would have undermined the yen most significantly.
He finishes by commenting, “A lot is riding on Abe’s next step (a near record yen short position to be precise) and we maintain that the scope for disappointment is much greater at this stage than the scope for Abe reinforcing his credentials as someone about to embark on aggressive and fundamental economic policy reform. USD/JPY at levels over 84.00 is looking more and more vulnerable.”