The latest week could prove to have been pivotal for forex trading. In our daily trading analysis in the past several weeks we have been focusing a lot on the JPY.
TRADING SCENARIO- The latest week could prove to have been pivotal for forex trading. In our daily trading analysis in the past several weeks we have been focusing a lot on the JPY. We have been worried about the economic outlook for Japan and on the insane deflationary policy being pursued by the central bank. It had been SELLING JGBs (withdrawing liquidity) while Japan has been suffering with deflationary pressures.
In the critical Tankan survey survey shown above look at the lines below the top two. They show that most sectors of the economy are turning down.
The BOJ finally has recognized this and did an about-turn on policy Friday. It now is FINALLY putting is focus on combating deflation. It raised its target for national CPI to 1.0 to 2.0% from 0-2.0% with an emphasis on achieving the bottom end of its target range. There is talk that National year/year CPI could fall to as low as -3.0% soon.
To achieve is +1.0% goal, the government and BOJ will be working together to increase liquidity in the system and weaken the JPY. This could mean encouraging the use of the JPY to finance carry trades because such activity generates JPY selling.
The goal would likely be to diminish the use of the USD as a carry trade financing currency, which has become very popular during the period of Fed Quantitative Ease (QE). It is our view that its been the USD carry trade that has been behind much of the USD to equities correlation trade. If the USD loses its role as the principal carry trade financing currency, we would not be surprised to see the correlation trade diminish and the markets to resume trading in a more rational pattern.
We expect a weaker JPY trade would likely be linked to a generally stronger USD pattern vs. Europe as well, as short carry positions are unwound. These trends should persist well into the new year. Expect subdued forex trading activity through the yearend.