Chart of the Week - JPY Chaos
The genesis and outlook of a major macro short-squeeze...
Following the BOJ rate hike last week (yes they are *increasing* interest rates), an enormous short-squeeze has kicked off in the JPY (Japanese Yen) — which has sent Japanese stocks into crash mode.
The JPY short-squeeze comes from a starting point of:
Crowded Short speculative futures positioning;
Consensus Bearish sentiment; and
Very cheap Valuations.
Given this starting point, and a few other factors, it could have much further to go.
Indeed it’s quite likely that the BOJ rate hike is going to end up being the catalyst to a major multi-year turning point for the Japanese Yen as sentiment and positioning gets shaken out, other central banks move to *cut* rates, and valuations mean-revert.
As for the wider implications and potential butterfly effects, the risk many are concerned about is an unwinding of the big JPY carry trade (where traders borrow JPY at zero/low interest rates and invest in higher yielding offshore assets and currencies). An unwinding of the carry trade and plain old repatriation (Japanese investors often look offshore in the pursuit of better yields) could end up unfolding in a disorderly fashion; rattling key markets across the globe.
As for Japanese equities, I think we are getting into bargain hunting territory here (especially for unhedged US$ Japanese equity funds — which benefit mathematically from JPY appreciation).
While a stronger JPY may well be a headwind (e.g. for exporters), there are some good things going on on the fundamentals front in Japan, and importantly valuations have reset significantly now. The Forward PE ratio for the TOPIX is sitting around 11x after an almost -25% correction/crash) vs an average over the past couple decades of 17x (and compares to about 20x for the S&P 500).
Quite simply; risk and opportunity are two sides of the same coin…
Key point: The Japanese Yen is at a major inflection point.
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Topics covered in our latest Weekly Insights Report
The latest premium report in our Entry-Level service here covered the following issues:
Global Market Update: important check on key market movements
The Compression Trades: next steps for oil, USD, bonds
Japan: insight into how far the JPY short squeeze may run
Volatility: thoughts on VIX and credit spreads outlook
Monthly Asset Allocation Review: positioning guide, macro/market outlook
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