Global Markets are in Panic: What the JPY Could Tell Us about the Long Term Trading?

Global markets entered what could end up being called a true panic, much of the credit expansion of the last few years has been miss allocated towards emerging markets and commodities. The long-term thesis is that much of the global expansion in production for the last few decades has been based on an unsustainable expansion of credit. Productive economies such as Germany and China, in particular, have employed a vendor financing model where their reserves were re-lent to their customers at ever diminishing rates to consume more production. It is worth noting the state of the global banking shares, they are along with general stock markets are showing a severe crisis may now be underway. Credit default swaps for banks are rising and in particular, Deutsche Bank in Europe is now under severe pressure.

Bond Yield

Expecting and forecasting yields to fall for months now and the downtrend is now underway. The long-term thesis has been for a final blow-off top in the bond market to complete the bull market that began in the early eighties. It appears we are now entering that stage in the market as a global panic is currently underway, we believe capital is moving from emerging markets into US Treasuries as the cleanest shirt in the laundry bag.

Interest rates have been held too low for too long and our current crisis is as a direct result of this failed policy

From close look on the COT data USD/JPY we see occurrence Surprising, since the beginning of upward movement In 2012 the margin was more or less the same level, and now we are witnessing a fork returns, whether this heralds a return the JPY to a Safe haven.

Rydex Asset Ratio makes it possible for us to analyze sentiment based on what investors are actually doing with the real money. We do this by calculating a daily bear/bull asset ratio and monitoring the ratio between assets in the two types of funds. The idea behind using the Rydex Asset Ratio and other sentiment indicators is that we are trying to determine when investors have reached a saturation point of bullishness or bearishness. So, seeing a bearish spike or overbought conditions, sentiment would suggest that selling is reaching saturation, we can see that we have “more room” for downtrend in the markets at least to the levels we had at late 2011.

USD/JPY has been known as a currency pair because of its close correlation with U.S. treasuries. When treasury bonds, notes and bills rise, USD/JPY prices weaken. This is a long position. The logic is that the U.S. would never default on its bond obligations, known as defensive assets, hence its safe haven status is secure.

Interest rates in both Japan and the U.S.

The pair is a measure of risk that determines when to buy or sell the USD/JPY, in terms of interest rates. Knowing where interest rates are heading will determine the direction of this pair

Carry trade

The carry trade is used when an investor or speculator is attempting to capture the price appreciation or depreciation in a currency, while also profiting on the interest differential. Using this strategy, a trader is essentially selling a currency that is offering a relatively low-interest rate while buying a currency that is offering a higher interest rate.

Investor borrows 100 Japanese yen at 0.1% – than he Converts yen into Australian dollar (AUD/USD) – Purchases Australian Denominated Bond Yielding 2.6% -Returns 2.5% on Differential (2.6%-0.1%)

For the investors there are some risks with this action – exposure to changes in currency rates, if the Australian dollar Strengthened against the Us Dollar more than 2.5% the results from this action will not give a positive profit, the second risk is the State, carried out a revaluation in the currency.

U.S. stock markets, treasury bonds and the USD/JPY also have inverse relationships. When stock markets rise, bond prices fall, yields rise and the USD/JPY should be sold because investors are more willing to trade risky assets. Stocks are viewed as risky assets and not backed by a government with the ability to turn if fear grips the market. Liquidity here takes on risk rather than the safe status of treasuries.

Changes in correlations may occur for many reasons, U.S. issues more debt by sales of treasury bonds and adds money to the system – if U.S. buys back treasury bonds and adds money to the system. Recessionary times are quite different. What if the U.S. dollar and the yen are both in a downtrend?

The traditional correlative points are: bonds up; USD/JPY up; USD down; yields down and stock markets up.

From looking at the charts we can see the relationship between index and currency (s&p500 vs. USD/JPY)

We can see something interesting: while the USD/JPY went up 106 level to 123, the s&p500 didn’t made the same move, was traded between 1815 to 2130 price levels.

What we can conclude from this break down is that the 1815 area at the s&p500 could send the USD/JPY down easily to 106 area, correlation between the two staying at 114.80 USD/JPY 1815 s&p500.

Bearish on the dollar

The markets have factored in further FRB rate hikes, but there are doubts about the figure of four hikes within 2016. Amid a lingering sense that further easing by the BOJ is approaching its limits, the dollar/yen pair’s movements are marked by a sense of fulfilment in relation to Japanese-U.S. interest-rate differentials. The dollar is expected to slide as real-demand investors build up hedges and speculators close out their dollar positions

The dollar/yen pair’s rise is likely to be kept in check by risk-evasive yen buying on the long-standing bearishness of crude oil prices; concerns about a Chinese economic slowdown; and ongoing concerns about geopolitical risk, with several regions across the globe at risk of terrorism. The next U.S. rate cut is likely to take a place from March or later, so the dollar is not expected to appreciate much on the back of rising U.S. interest rates

Bullish on the dollar

The theme will remain the pace of U.S. rate hikes. There is a gap between the forecasts of FOMC members and market participants when it comes to the pace of rate hikes, so the dollar/yen pair is likely to search for a sense of direction this month while taking on board the U.S. employment results and other data

Technical outlook on the USD/JPY:

 

Analysis of all assemblies, we can see- Breaking area down from 114.30 to 80 pair, will lead to a strong descending process, the next support is located only  at 106 area. Move in the future, may give a strong boost to Markets Exchanges a strong move downward.