The yen is winning the race ot the bottom
As most of you already know, I am hanging up my hat as MoneyWeek Trader as of Friday 29 April. But despair ye not, I intend to post more Trader-like articles on my blogsite from May onwards.
And if you have not done so, you can use the sign-up box on the home page to receive my posts directly in your email inbox the moment I post them.
Another week, another set of dreadful US economic reports. Corporate earnings continue to disappoint with Alphabet (aka Google) dipping a mighty $40 yesterday and the Darling of the Nasdaq – Netflix – swooning by 14% last week. Even that stalwart Microsoft shed 7% on weaker earnings. So maybe reality is finally starting to rear its ugly head in the Wall Street casino.
On the broader front, PMI Manufacturing Index came in weaker then expected and is flirting with the 50 break-even level. Leading Indicators continue to trend downwards and also flirts with the advance/decline 50 line.
This is what you see when a new deflationary wave that is about to be unleashed.
But of course, investors figure that any earnings is a lot better than a negative yield on debt piles. I read that German car dealerships are offering deals where the customer delays paying until a year after purchase. This is to avoid taking a loss on the bank deposits of the dealership! Is it me, or has the world of finance gone nuts?
If this keeps up, Germans will be able to ‘buy’ a new car and never pay for it – the dealership and car manufacturers will shun accepting any payment at all for fear of losing mon
And that desire to avoid a negative yield has motivated investors/gamblers to pile into stocks. Hedge funds, mutual funds, insurers, pension funds and their ilk have become totally price-insensitive and this has resulted in the S&P now trading at an elevated P/E of 24x.
As David Stockman has maintained, this headless drive for yield – any positive yield – has totally distorted asset prices, especially the cost of money (but this is about to change). And the culprit has been the central banks of course. These quasi-governmental bodies have with their QE, ZIRP and NIRP policies totally destroyed the honest price-discovery mechanism that ‘free’ markets are supposed to supply for capitalism to function properly. Markets have not been free for years, but the good news is that they still conform to analysis using my tramline methods!
And one of those markets I have been carefully watching for signs of a major turn is the US dollar, which was in a general uptrend and is currently in a corrective phase. I believe it is on the verge of a major move up out of the correction.
To recap, the action of global central banks to trash their currencies in a desperate attempt to stimulate their economies will result in the US dollar remaining as the last man standing when all the dust has settled. That has been my firm view for a long time.
Incidentally, Japan and Europe have policy rates that are getting deeper into negative territory and I am wondering what would result if the US follows them into negative Wonderland? This is not so outlandish as many believe. It is definitely not on the radar of many, which makes it an intriguing idea at least to yours truly.
The Fed must be eyeing very nervously the deteriorating domestic economic data and must have plans to not only delay increasing Fed Funds as they have previously indicated, but to lower that rate further to follow the BOJ and ECB, and possibly going negative. They will not consider helicopter money, I believe.
And in that event, it would shake things up a tad – and send stock markets plunging.
Naturally, when a Fed member opens his/her mouth, the words will be parsed to death, and just one inkling of the above scenario is sure to send shock waves into the markets. Even a denial could magnify anxiety levels. We will get the monthly Fed obfuscations next week, so be alert.
Meanwhile, the gap between US rates and Japanese rates – which have been wide for years – is getting wider with the announcement yesterday that the BOJ is considering taking rates even more negative. Their rapidly ageing economy is in decline and we all know that the BOJ is powerless to turn things around. For that, they need a sudden influx of young workers and that will not happen (birth rate remains low and immigration is a no-no).
And that means I have a wonderful setup in USD/JPY. In fact, all signs point to this being one of my Trades of the Year. And to boost my chances, I note that hedge funds are now net bearish the dollar for the first time in two years (COT data).
Regular readers will know that I have called major turns in many markets just when hedge funds are at their most bullish/bearish and totally caught with maximum wrong-way bets.
and in fact, it is following the US Dollar Index closely:
It was the same in the summer of 2014 where I spotted an historic opportunity. If correct, the market is about to charge north in the final fifth wave which should take the Index to at least the 120 area.
And one of the greatest beneficiaries will be in the USD/JPY trade.
Wave 4 has lasted fifteen months and is in a classic five-wave continuation pattern (see text, pp 38-39, 144-145). Weekly MACD is turning up and this is the short-term hourly chart:
From the 1.08 low (when most pundits were screaming ‘parity ahoy!’) and where the market had completed fives in several degrees of trend, wave 1 is in the classic five motive waves up – and signaled the change in trend.
The pull-back to the wave 2 kiss on my tramline was the signal to go long, which VIP Club members did. To verify this count, I needed to see a strong rally in wave 3 in a scalded cat bounce away from the kiss – and got in spades with yesterday’s 240 pip gain to over the 111 level (a gain of 350 pips from the lows).
During the ‘surprise’ rally in the yen following the January negative rate shock (that wasn’t supposed to happen!), the funds switched attention from the yen to the dollar – and took Janet’s hints that the Fed will not after all tighten policy.
Now, the BOJ has ratcheted up the upward pressure on the dollar – will Janet flinch next week? The Fed is between a rock and a hard place here – damned if they do and damned if they don’t. With a severe upward dollar move, US manufacturers will naturally squawk louder – and increase pressure on the Fed to do something!
My analysis also conforms with my view that the euro is about to be whacked again – and we also have good short positions working.
If you wish to join the VIP Traders Club members in these moves, just drop me a line.