[Calxy]

IS CNYJPY the key to USDJPY?

• China is now Japan’s biggest trading partner so maybe we should be paying more attention to CNYJPY than USDJPY to actually figure out where there could be concern on USDJPY.
• In November 1999 CNYJPY hit 12.30 as USDJPY hit 101 and they both turned
• In January 2005 (62 months later) CNYJPY hit 12.30 as USDJPY hit 101 and they both turned (Next time we hit 12.30 –march 2010?????)
• In 2008 USDJPY went through 101 like a “knife through butter” but there was a big difference this time. From 2005 through to 2008 China let the Renminbi (Yuan) appreciate against the USD. As a consequence when we were back at 101 in USDJPY in 2008 we were not back at 12.30 in CNYJPY.

USDCNY- Here’s the difference

• After 2005 this rate was managed lower but has now gone static again around 6.83

The new administration in Japan has indicated that they do not believe in intervention. Time will tell but the facts are
• Japan remains an export led economy
• It continues to struggle to grow and/or create jobs/inflation/spending
• China is now their largest trading partner

o IF broad based USD weakness re-emerges
o IF China holds the exchange rate here when that happens
o IF USDJPY starts to move lower

We would suggest that USDJPY might run into a brick wall around 84.00. Why?

84.00 (USDJPY) divided by 6.83 (USDCNY) = 12.30 (CNYJPY) (The line in the sand in CNYJPY in November 1999, Jan 2005 and Q1 2010?????)

Medium term bias remains for Japanese 10 year yields to head higher

• Held the 76.4% pullback level and since move higher. His after major support in the 1.13% area held earlier this year.
• Initial resistance is met in the 1.47-1.48% range and then above here at 1.55%.

A break above this latter level would suggest the potential for extended gains (Possibly as high as 2%)

If this yield view is correct together with view of higher long term U.S. yields the suggestion here would be.

• That USDJPY could lead in periods of USD bullishness if yields are heading higher but could range trade if not
• That USDJPY will likely lag in periods of USD weakness if yields are holding up and only lead if yields are also falling at this time.

Nikkei losing steam?

• The recent rally seen in the Nikkei (The 9th bull market (Rally of over 20%) seen in the last 20 years) looks to have run out of steam at good resistance around 11,000
• It posted a bearish weekly reversal at the peak of this bounce before falling away. A weekly close this week below 10,125 would be another bearish weekly reversal and suggest that further losses could be in prospect.
• If accompanied by a break below 9,800 it would complete a bearish head and shoulders top that would suggest further losses towards about 8,425.
• Despite 9 bull markets in this 20 year period ranging from 22% to 63% in magnitude the Nikkei remains nearly 75% below its all time high and pretty much unchanged sine 1984.

Overall looking at these charts the suggestions are:

FX:
• We may be close to a pause in recent JPY weakness against other G10 currencies which could also support more broad based view that the USD trade, the commodity trades, the Equity trades etc that we have seen for the last 8 months may all be losing steam. This does not suggest a trend change as the medium term views of a weaker USD (EURUSD over 1.60 by early 2010 for example) and higher long end yields would be supportive of relative JPY weakness in G10 space.
• In addition we suspect as detailed above that if USDJPY falls the new “line in the sand” could be 84.00

Interest rates:
• Long end Japanese yields look set to move higher, the curve looks set to steepen but 2 years yields (and thereby official rates) look likely to remain static.

This suggests supply issues rather than inflation may be the dynamic here which may also temper JPY strength and eventually result in further JPY weakness.

Equities:
• The Nikkei has spent the best part of 20 years in a structural bear market punctuated by 9 cyclical bull markets. It remains close to 75% off its all time high and as yet we see no signs of the reemergence of a structural bull market. (If nothing else this should warn us about complacency in U.S. equity markets)