Monday, July 9, 2007

Good Monday To You

I hope everyone had an enjoyable and safe 4th of July holiday. I know everyone and their brother is bearish on the yen, starting with papa san and mama san all the way to the most obscure hedge fund being run by an 27 yr old English major whose prior work experience is a proof reader at Random House (apologies to Henry Blodgett). Now I am no physics major, far from it, but if everyone gets to one side of the boat, the vessel will capsize. It is not a matter of if it will but when. This Bloomberg article shows the extent of the participation in the yen carry trade. For the uninitiated, the yen carry trade is borrow yen at 0.50% or so convert to the desired currency say U$ and buy whatever you like.

Being a proud Canadian (of the physical country, not the politicians or multitude of hypocrites who inhabit it), I was around watching with great interest when the Cdn$ plummeted to a low around 67 cents to the U$ back in July of 1998. No one and I mean no one was bullish of the Cdn $. My friend Dennis Gartman was making the rounds telling everyone and anyone who would listen to think all things Canadian. He was predicted par with U$ and was roundly ridiculed everywhere he spoke, especially so in Canada, of all places.

So here we sit at 95.50 cents to the U$ and on our way to par or better and I do feel that the Alberta tar sands makes the Cdn$ a petro currency in my opinion) and everyone and I mean EVERYONE is a Cdn$ bull. For the non-history majors the Cdn$ did trade at a premium, yes you read that correctly, a premium to the U$ back in the 60's. Having worked in retail brokerage for 14yrs I can tell you that retail are the last to jump on a trend and you can be sure we are in the late stages of the game. Now don't get me wrong retail customers were some of the nicest people but they just were not cut out for the world of trading. My grandfather always told me that an investor was a trader who made a mistake and would not admit it. Now there is no guarantee as to when it will end as it could go many extra innings but the risk/reward gets skewed dramatically in the wrong direction and hence the public overstays its welcome and is saddled with big losses. I will copper the retail public trade every time.

So back to the yen what we have is a near unanimous bearish stance by the institutional world as well as the everyday Japanese investor. This unanimity ususally can and does mark signifcant inflection points. The $XJY daily chart (2nd from top) shows 82 as the number we need to get thru which also coincides with the 50 day MA which currently stands at 82.17. Some very nice positive divergences are showing up on RSI and MacD but these don't mean jack (for proof ask your margin clerk) as we are loyal to price and then volume in that order. I have a small exploratory position in FXY (last chart above) at 82 so I am watching and waiting looking to add thru 82 and then 82.75 -83 area. The $XJY weekly chart (top center) shows a possible falling or bull wedge. Positive divergences are seen in the RSI and MacD. Remember, Wall St. does everything in herds and this yen carry trade has been a major prop under this whole market. Every proprietary desk on Wall St. is in this along with every hedge fund out there. It is the foundation under which all other leverage is piled. Even if you are not looking to trade this particular item, it holds significant ramifications for other markets. Please remember it takes a lot of buying to put a market up, it takes a mere lack of buying to put a market down. Treasury bond market investors will are finding this out the hard way.

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