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Key News

• Orders for U.S. durable goods unexpectedly fell in February, led by the biggest slump ever in demand for machinery. (Bloomberg)
• The euro rallied versus the dollar on Wednesday after a surprise rise in German business sentiment poured cold water on any expectations of near-term euro zone interest rate cuts. (Reuters)
• The stock market is trading right where it was nine years ago. Stocks, long touted as the best investment for the long term, have been one of the worst investments over the nine-year period, trounced even by lowly Treasury bonds. (WSJ)

Key Reports Due (WSJ):

• 7:00a.m. MBA Mortgage Refinancing Index. Previous: -4.6%.
• 8:30a.m. Feb Durable Goods Orders. Expected: +0.8%. Previous: -5.1%.
• 10:00a.m. Feb New Home Sales. Expected: -2.2%. Previous: -2.8%.

Quotable

"I heartily accept the motto, ‘That government is best which governs least’…Carried out, it finally amounts to this, which I also believe,–’That government is best which governs not at all."

Henry David Theoreau

FX Trading - Backhand Time for Yen lovers?

The dollar is getting pummeled again today. Good news from Germany helping the euro and bad news on US durable goods orders hurting the buck across the board. The yen is have yet another excellent day. But, just maybe it is overdue for a rest.

Don’t get us wrong, we still like the yen in a world which consists of continuous intermittent bouts of unwinding leverage. But, we do think what the Fed did during the Bear Stearns affair helped bring a modicum of confidence back into the credit market. And we think the Fed’s steps were real and unusually well thought out, given the rather crazy credit-creation-driven monetary system in which we find ourselves. In short, is it time for the carry unwind to take a breather on some risk seeping from the system?

Below is a chart of yen-$ (not the usual $-yen you are used to seeing) comparing its move the last time we saw a significant unwinding of the carry trade, back in 1998, triggered by the Asian Financial Crisis - the yen-$ surged 46.7%. We then looked at where the yen was before the unwinding of the carry trade began in 2007; this time triggered by the Subprime-cum-Credit-Crunch. The point is, if we see a similar move this time, i.e. 46.7%, then yen-$ carries to the 118.00 level; it is now at 101.25.

Sure, it is a bit simplistic to say yen-$ will rise 46.7% this time around. But when you consider the carry trade was estimated to be about seven-times larger in 2007 than it was in 1998, it gives some perspective. And given that the credit crunch, and unwinding of leverage, is more pervasive than the Asian Financial Crisis, we think it increases the probability this simple analysis could play out, and yen-$ can go higher.

That said, another thing you may notice about the chart above - it’s looking parabolic! How much longer can the yen march straight up against the dollar (USDJPY straight down) without a breather? The real answer: No one knows when or if the yen will take a breather, but it may be a time to play for one.

A summary from the Commitment of Traders Report (CME Long Form) showing open interest in the Japanese yen for Non-Commercial speculators:

Now we all know how insidious and sadistically Mr. Market can act at times. This is evidenced in his ability to wait for the maximum amount of players to commit before he delivers an ugly blow. Open interest tends to give us a handle on the level of and depth of commitment to a particular position, and possibly some insight on when Mr. Market is about to deliver a stiff backhand to the jaw of those feeling good about their position. At 76% long, we may be inching ever so closer to backhand time. The headlines will not read: "Punters were slapped by Mr. Market." Instead, we will see something such as: "Profit-taking in the yen."

And if we see "profit taking" in the yen, where might traders move those profits over the near-term? Maybe into a commodity currency with yield and growth - two things valued in a world if credit isn’t frozen solid.

Above is a cross-rate chart of Australian dollar compared to the Japanese yen. It shows the Aussie peaked at around 108 against the yen back in October 2007 and has been losing ground since, now trading near 91. Maybe it’s a decent risk/reward setup. Key word there is, as usual, "maybe."

Jack Crooks
Black Swan Capital
http://www.blackswantrading.com

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