THE PAYOFF - My bearish Yen outlook has been well advertised for some time now, and as you all know, this has been one of my favorite medium to longer-term trades out there. I had been calling for a USD/JPY bottom for the entire 2012, after the market looked like it had put in a meaningful low (record low) in late 2011. I argued that both technically and fundamentally, the pair seemed poised for a major trend reversal. The added bonus of not having to worry about negative carry with this trade definitely made the play even sweeter. Well…the past few weeks have been extremely encouraging, and it looks as though the trade is finally starting to build some legitimate momentum. I am targeting a move well beyond the current yearly high at 84.20.
IN GOOD COMPANY – One of the things I have noticed, and admittedly have also found comfort in, has been the support for this trade from some major global macro players. While I tend to stubbornly, and almost exclusively shy away from anyone else’s thoughts on market direction, it has been difficult to ignore these other strong calls for Yen weakness. I have long respected the views of David Einhorn over at Greenlight Capital, and he has been one of these guys calling for Yen weakness for some time now. More recently, Jim O’Neill over at Goldman Sachs (thank you goes out to my main man Jonny for the heads up on this one :) ) was out with his Viewpoints, where he spent a good deal of time talking about the Yen. While the entire letter is a great read, here are the relevant points from Mr. O’Neill on the Yen:
REVELATIONS FROM ROME - (Friday, November 16, 2012)…”I spent a pleasant 24 hours in beautiful Rome this week where the sun was shining and it was a warm 24 degrees, it was delightful. I was there to participate in a rather secretive but well known meeting of some of the world’s most important family offices, which I always find interesting because firstly they invite all sorts of independent thinkers, and secondly, maybe it is coincidence but they are often amongst the most bearish people I encounter…Each of us was asked what our best 3 ideas were and I agreed with all of theirs. My own 3 ideas were to be long $/Yen, long $/Yen and long $/Yen as I shall discuss below….”
“…From the Plaza Accord of September 1985 all the way until I joined GS in the Autumn of 1995, I was bullish Yen, and after a brief shift to being temporarily US$ bullish, I returned to being a Yen bull from 1997 until a few years ago. I was quite chuffed with myself for understanding the Yen and it was based on pretty simple stuff, Japan’s persistent and strong balance of payments, especially its trade and current account surplus, and its associated rising equilibrium exchange rate.
All of this has reversed and recently, Japan was reported its first ever current account deficit, or certainly, its first for many decades. They have a very overvalued exchange rate, a collapsing export sector, an unnreformed domestic economy, a debt challenge that makes Greece’s seem easy to solve, a central bank that doesn’t try too hard – currently – to reach its inflation target and, once again, a very weak economy. And that is without even getting into the complex issues of its relationship with China and other Asian countries, that in principle should be as good for them as those countries are for the rest of us.
Anyhow, we may soon see a general election and a return of the LPD, whose probable Prime Minister has told us now 3 times in the last fortnight that he would force the BOJ, if necessary, to pursue a 3% inflation target. This is the sort of thing that many were advising Japan from overseas in the mid to late 90’s when so many people mistakenly lost of lot of money betting against the Yen. Go get all those guys out of retirement as the time has probably come.
The outlook for the Yen is highly asymmetric. It could either waffle around, or could decline sharply in coming months. It is, in my opinion, the most interesting macro thing out there. I have been getting more and more negative about the Yen for the past couple of years, and I have, so far, been wrong, but it seems more and more obvious to me, that the moment is here.”