Why JPY Crosses May Backfire

For Reuters, it is no longer just the Japanese
Yen – it is the ‘low-yielding’ Japanese Yen. Such attributes the financial media
uses during certain stages of a trend have a long, established history of
backfiring swiftly and strongly.

Part of the rationale for my already multi-month
bullish view I have had of the JPY crosses (starting with my ‘sizable recovery’
view I had of the NZD/JPY during May – June) has been purely intuitive – though,
intuitive in a contrarian sense. The more ‘obvious’ the Japanese fundamentals
became in the public perception and the louder the demand for a ‘logical’
causative relationship to be reinstated in the JPY markets – the higher the JPY
cross pairs, I thought, could extend further.

In the daily chart timeframe, during September –
October price behaviour of the Swiss Franc and the Euro against the Japanese Yen
took a ‘triangular’ shape. The GBP/JPY did not stamp its own daily chart with a
‘triangle’ – although in a November 14th note to clients I came to write: ‘I
wonder whether the depreciation that we have seen today in the GBP/JPY could
actually trigger the terminal leg of an A-B-C type of correction that might have
started on September 1st’. That ‘A-B-C’ call seems to having been confirmed
these days, it is only that I thought that ‘terminal leg’ could yet take more
time to develop (following charts copyright NetDania.com).

Moreover, I suspect – again, intuitively – that
the market appeared to be hugely short USD/JPY at the level of this pair’s
October highs, an assessment apparently confirmed by series of sentiment /
positioning indicators and surveys of various retail FX brokerage houses. That
explains from a certain, contrarian angle why the US Dollar has not lately
registered the same dramatic down movement versus the Japanese Yen as it has
against other major currencies, as well as the price constriction and then the
surge of the Europeans against the JPY.

I am not an astute forecaster or even commentator
of fundamental events and developments – as I also like to think the next major
move in the JPY cross pairs will prominently be a technical one i.e. a sudden
rearrangement of demand and supply will be triggered mainly as a result of
overstretched conditions that have grown embedded in the price itself. But if I
were to think of ‘fundamental’ surprises possibly underway, I would primarily
think of two:

First off, Japan may hike interest rates even as
early as this month. Bank of Japan Governor Toshihiko Fukui reportedly called on
November 28th, at a meeting of business executives in Nagoya, that an interest
rate increase is ‘unavoidable’ in order to ensure the economy’s expansion.
However, according to a November 16th – November 24th Bloomberg survey, only 4
out of 14 economists interrogated expected the Bank of Japan to raise the key
overnight lending rate in December. So, I dare presume, Japan’s hiking interest
rate may present itself as an element of surprise for the market, if it is to
happen in just a few days.

A review of public statements a number of top
officials from Bank of Japan have made as of late – starting with the one
uttered by Governor Toshihiko Fukui in Nagoya on November 28th – reveals an
increasing probability for an interest rate hike to take place in Japan as early
as this month.

What I think is the Japanese top financial
authorities possess a very specific sense of being subtle. I recall them in mid
July last year talking down the un-wanted eventuality of a Japanese Yen
appreciation, and reassuring the markets Tokyo would show no hesitation to
intervene if that currency appreciation were to happen. Such an ‘official’
assessment of the exchange rate picture was strange at the very least, since the
FX volatility at the time was hardly spectacular whereas the major USD/JPY had
already rallied for almost 1,000 pips away from the pair’s January lows.

Then, it all made perfect sense only a few days
later, when on July 21st China revalued the Yuan, and the Japanese Yen posted a
swift appreciation both versus the US Dollar and via its cross pairs (following
charts copyright NetDania.com).

I believe that, upon gaining early information
about forthcoming events, Tokyo officials may want to convey messages of various
degrees of subtlety to the currency markets – especially when those events do
not seem to having been priced in by the public. And the situation may be as
much more severe as those ‘events’ have the potential to leading to a swift and
powerful appreciation of the Japanese Yen in markets which have already grown
overextended (like, at the present time, the JPY cross pairs).

According to 10 out of 22 economists surveyed by
Bloomberg between November 24th and December 11th, the Bank of Japan is to
increase borrowing costs to 0.5% at its December meeting. Therefore, I guess, an
interest rate hike taking place as early as this month would still show off as a

There are opinions as well that a December
interest rate hike in Japan will still be seen by the financial markets as a
risk to the country’s economic growth, virtually pushing the Japanese Yen even
more down. Should that happen – even though I perceive the nowadays markets
being globally far more focused on the interest rate theme rather than on the
economic growth prospects – that will still be ‘fine with me’ as technical
conditions linked to the JPY cross pairs will probably become even more

The second ‘fundamental’ surprise may arrive if
China decides to revalue the Yuan ahead of the forthcoming, December 14th – 15th
visit of U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben
Bernanke in Beijing.

Ultimately, my decision to sell short a JPY cross
pair will be mainly a technical one. There will be no ‘fundamentals’ decisively
triggering a positioning decision unless a certain price configuration presents
itself. But that basic premise certainly does not stop me from spotting
‘anomalies’ and virtual elements of surprise within the ‘fundamental background’
– on terms of my own perception, of course.

Reuters utilizing the attribute ‘low-yielding’
with regard to the Japanese Yen is the financial media’s ultimate acknowledgment
of the ‘obvious’. But according to another, far wiser Eastern-European, money in
the markets is made by discounting the obvious and betting on the unexpected.

Mihai Nichisoiu
started to trade currencies first in the local futures
market, then in early 2002 moved to dealing in the wide foreign exchange. Since
the beginning of 2004, Mr. Nichisoiu has become mainly engaged in building a
personal long-term track record in the sense of posting high rates of return
only if at the expense of tight and rigid approaches of risk. Mr. Nichisoiu won
the August 2005 edition of a popular global demo trading contest, after
constantly achieving top rankings during an 11-month long participation. As a
currency speculator, Mr. Nichisoiu is also actively involved in managing and
providing counseling and advisory to a small number of long-term private

Mihai Nichisoiu can be contacted via his recently established, personal website