Please note, that this article comes from my archive. Check the actual date in the header.
We can easily travel in the Matrix of financial world, as long as the helmet is still on and plugged in. And we are heading to Japan. People living here has their own unique culture and believe in money with their own way. They are workaholics with highest average working hours per week and one of lowest unemployment in the world. At the same time, Japanese people do not spend all the money they make in a way like consumption western cultures usually do. These are just partial reasons why little islands with no commodities became third largest economy in the world. It was the second before China started massive run, but how can you compare these two countries?
Japanese credit market is full of liquidity with regulators trying to create any possible additional demand for money. It is an export oriented economy with most of the profits coming from abroad. Do you know where is headed significant part of that profits? Right, back to the regions it came from. Japanese corporations use a weapon of investing abroad, boosting the driver of their own wellness - consumption. While western world is heading into a new activity season of the year in the beginning of September, Japanese financials are on their sixth month as financial year in Japan starts and ends in spring. Every year we observe a flow of abroad investments back to Japan in the month of March. Funds are usually converted back into Japanese yen to report earnings and pay taxes. Financial flows are ready to move again after this important procedure is done.
We had a delay till the fourth week of April this year before JPY money flow abroad has been renewed. The reason is very simple - Presidential election in France. Populist Marie Le Pen was very ugly and scary for investors. Big money like silence. Let me show you daily chart of EURJPY.
Everyone can see the long shadow of the April bullish candle. It became bullish exactly after the French election by the way and accelerated strong uptrend of EURJPY. The pair is +11% since then.
Next part of the puzzle I’m trying to show you will be mathematics. Very simple, nothing complicated. Here is a table comparing Japanese, German and French equity indices futures with the values in two currencies and % changes. We took one year as the period for comparison.
Value, EUR
01-SEP-16
|
Value, EUR
01-SEP-17
|
Change, %
|
Value, JPY
01-SEP-16
|
Value, JPY
01-SEP-17
|
Change, %
| |
EUR
|
---
|
---
|
---
|
115.38
|
130.98
|
+13.5%
|
NIKKEI225
|
146.34
|
149.99
|
+2.5%
|
16885.16
|
19646.24
|
+16.4%
|
DAX30
|
10622.33
|
12092.00
|
+13.8%
|
1225604
|
1583810
|
+29.2%
|
CAC40
|
4448.03
|
5115.50
|
+15.0%
|
513214
|
670028
|
+30.6%
|
Aren’t these figures much more attractive for Japanese investors to move abroad rather than stay in Japan?
Let me guess, what you’ll say next. It’s a high-yield and high-risk market, it does not show all of the picture of capital flows. I agree with that. My bet to stay long on EURJPY is based on suggestion that ECB does not have much choice rather than to stop QE and start tightening cycle. This action, or even a start of several consecutive actions in the nearest future, would create additional demand for credits, boosting yields of European bonds. Once ECB will ease the injections of liquidity to the system, European credit market will become much more attractive for foreigners, than it was in recent years. And it comes to a completely different volumes of funds flow...
By the way, Canada has the same story with BoC has already started hiking the interest rates in July. Look at the weekly USDCAD chart below.
We observe close weekly prices below weekly SMA200 first time in four years, which indicates strengths of Canadian dollar not only versus the greenback, but versus the yen as well. We’re also long on CADJPY for the nearest future. Expectations of the rate hike from BoC during the meeting this week are rather low. But there is a room for a surprise, especially as we did not have much comments from Canadian regulator officials. The markets have already priced in rate hike in October, however.
But let’s get back to the Euro as most traded currency after USD. One more interesting asset is EURGBP cross-rate. The markets are full of rumors about possible parity of Euro and pound. The pair gained + 9% since French election so far. We agree that such strong uptrend could continue this fall with sterling weakness due to Brexit impact uncertainty. Plus British exporters have a huge benefit of the currency depreciation in the scope of competition with European companies. But we need to be cautious before making such prediction. Remember, we talk about a cross-rate, which has two components in the price: EURUSD and GBPUSD. If EURUSD will continue the uptrend, GBPUSD has to stay in a very tight range in order to push EURGBP higher, which would be rather hard to achieve if the greenback continued to slide across the board. Plus it’s not that easy to move further for currencies when they become extremely expensive or cheap comparing to other currencies. We had a lot of talks about possible parity in EURUSD last year, but it did not happen, because Euro was very cheap to depreciate more. We already had surge periods of EURGBP in December 2008 and July 2016, but the highest level it achieved, was 0.9805. Here is weekly chart https://invst.ly/50hho
MACD is far the extreme levels we’ve seen during the peak in December 2008, while fast RSI pulled back a bit from extremely overbought levels. Technicals show enough room to move higher.
End of part II. To be continued...
Please note, that this article comes from my archive. Check the actual date in the header.
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If you are interested to get more fx market analysis, please contact author:
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