What’s driving the JPY?
We can safely say that not a lot moves the JPY these days, at least not vs USD. Most of the major CB’s are in a wait and see mode, no one knows exactly what’s going to happen for the rest of the year. Is the global slowdown going to deepen or is it finally not all that bad? We are all data dependent but as I’ve been repeating a good number of times, the currencies are all “trade” dependent. Nearly everything will depend on how trade issues will be dealt with between Us and the rest of the world, China and the rest of the world and Brexit.
In Japan, Kuroda and friends are not making much headway towards their goals but can continue to hide now behind the rest of the CB’s being on standby, keeping their foot on the easing pedals.
As a result long term investors can only wait for things to take a direction before jumping back into the FX market. In the meantime they’re having more interest in trading bonds and equities.
So what about this fiscal year in Japan?
The first month, April 2018, when Japanese corporates were setting their ’18/’19 budget rates, we traded USDJPY between 106 and 109. In September, where some make half year revisions, the market hovered between 110 and 113. Taking a simple middle, but usually their estimations are more on the defensive side, the USDJPY budget rate for fiscal ’18/’19 was mostly 108-109 for the businesses.
From mid January and into Feb we have been hearing about bids 108 and below and offers above 110 from Japanese side. Importers were trying to buy USD close or below their budget rate and needing to increase the amounts as, Japan being a large energy importer, prices were rising. Exporters on the other hand we offering 110 and above, beating their budget rates but needing to take the negative forward points into account. Hence they slowed the then bid USD rise quite bit.
Looking at how USDJPY behaved since then, we can assume most of the exporter offers have been satisfied above budget rates but maybe not all importer demand although some of them might already have gone to the market as the sporadic risk off dips have been shallow. It’s also traditionally the case that the carmakers, being the largest exporter segment, are more active hedgers than the importer segment. There I think the year end need balance should be tilted to the buy side but of course never know how much is left to execute.
Seasonally then, the past 13 years have seen 8 March months up, 5 down in USDJPY. Trying to find a pattern for the whole month is nearly impossible. But the last week of the month is more interesting. There we tend to see a rise in USDJPY. It’s not rare that the last day of the fiscal year Tokyo fixing prints a relative high. It used to be the case that the market saw price keeping operations from BOJ in the ETF and REIT’s markets, especially during the deflation years. But even in the recent Abenomics years, where Japanese officials have tried to convince us deflation is beaten, we still have seen a rising last week apart from 2013 and 2015.
The unknown this year are the asset and pension fund managers. Their performances have been variable to say the least over ’18/’19 exercise. Do they need to repatriate JPY? Possible but if such were the case, we may have had a hint of it already during the Tokyo sessions this month. But it’s been very slow over there and if anything USDJPY not offered in the Japanese timezone. We know they are still planning to up their unhedged foreign investments in the new year (Nippon asst mgr being a leader of the pack, we can expect others to follow suit) as reports have circulated, so they will have to buy currency vs JPY at some stage to invest abroad. But I’m not betting against the fact they may have some left overs to do on the other side first.
How am I looking to trade it?
Of course we have an FOMC to come this week which could stir things before the last week of the fiscal year, but my 2 bucks go to a prudent, patient meeting outcome, aligning a few dots ok, Fed could announce the end of QT towards the end of the year ok but is that not all expected or hoped for by the market already? From that side I don”t really expect to much fireworks tbh. But prudence is my advice in any case.
We also have to be careful trading “risk” correlations in March through JPY. Natural flows can be far bigger than the few algo’s throwing the pairs around when equity markets rise or fall. I trust you all have noticed by now JPY has been pretty immune to or countered quite quickly any risk related moves lately. If I trade “risk” in March , it’s never for longer than a couple of hours.
Lastly as always, any serious news on trade can turn anything that happened up to now 180° around.
But the steady price action has told be to be rather long. Also the steps it has taken since January tells me there has been a recurrent interest to buy USDJPY on dips. As we can see there are 5 clear steps on the chart. And lastly, the above combination makes me think we may be in for another move higher next week.
So, being cautious, I’m currently long 1/3 position. FOMC will tell me to keep it, cut or add to half steam ahead of next week.
There’s a first trend line at 111.10 but that’s a bit close to the market. Any headline or adverse flow can take the position out too easily.
I am watching 110.75 on this position, it’s the 38.2% fib of the March-Oct ’18 rally. I don’t take the 2nd Jan flash crash into account as no one knows the exact low there but it’s pretty close to the 104.63 23rd March last year. It’s also the last real dip low, which held rock solid and hints at decent demand.
And from already a few sessions I am carefully watching Tokyo fixings and the session’s price action until 4PM local time. It’s going to get increasingly important in order to know what Japan inc. Is planning to do.
If all goes according to my plan, which will most likely go paired with a renewed break through 112.10/20, I will be looking to add on that break too, start to put some trailing stops in place and see where this month ends up. We never know what’s happening to the USD but I’m not excluding a return into the 113s for the last day of the fiscal year.
Update to follow once there’s a few more pieces to the puzzle.
Safe travels and happy hunting.
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