As Abeconomics Lose Effect, Morgan Stanley Sees Yen 16 Percent Higher

by on January 10, 2014 5:52 am BST

As the markets look for more stimulus from the Bank of Japan (BoJ) due to struggling follow-through from Abeconomics, Morgan Stanley reports that Japan’s inflation and overspending will send Japan’s finances over the edge. The public debt, which has been large to begin with, expanded to over ¥1 quadrillion (yes, quadrillion!) with Japan’s net liabilities will increase to 142 percent of gross domestic product by this year.

BlackRock CIO for fundamental fixed-income Rick Rieder said “You think where the crowded trades are in the system today — people are riding Japan.” Trading Japan has been a good trade but one to watch carefully. Reider is optimistic of Japan’s potential while citing the overwhelming debt burden, “they also have a burden that’s incredibly high in front of them in terms of the size of debt load. In 2014 are we going to have all the signs that things are going reasonably well? I think so in Japan.”

However, the overcrowded yen short is likely to play out in 2014, according to Mitsubishi UFJ Morgan Stanley Securities Co. and Westpac Banking Corp. The duo believe that the yen will increase 16 percent and bring the yen down to 90 per dollar, the USDJPY exchange rate is currently 104.93, according to Naohiko Miyata. “We’ve probably reached a bottom in the yen, and if that proves to be true, we’ll see a large rebound,” said Miyata, who correctly forecasted the end of the yen’s 40-year bull cycle in 2011 and relies on Elliot Wave analysis.

Westpac predicts a drop in the yen, not as severe than Mitsubishi UFJ, to 99 per dollar by the end of 2014. The primary cause is cited as the inability to create new options to expand monetary easing by the Bank of Japan (BoJ). “The BoJ had a great run last year, but the market is questioning, what tricks do they have in their bag now? Any major announcements will probably have less of an impact this time around compared to last year,” said Jonathan Cavenagh, strategist at Westpac.

I believe the yen will become more bullish on a combination of the inability of the BoJ to satisfy continuous monetary easing without creating massive systemic risk coupled with the “safe haven” yen trade that is likely to take place with the potential top in equities heading into earnings season and further tapering by the Federal Reserve.

The two year weekly chart shows the massive run higher in the USDJPY after breaking through a symmetrical triangle. The RSI flirts with over extension, but yen pairs find this area comfortable. What is interesting is that the USDJPY is up 10 of the last 11 weeks, and the weekly candle, that the high of 105.43 was made, closed as a bearish hammer doji showing selling pressure. This could suggest a downward move.

Given this scenario, a move lower to 102.61 is a logical first downward step given weekly price action with 101.25 being the secondary support point. However, the 50 percent retracement from the low of the breakout pattern to the USDJPY high shows that 99.75 is the likely 2014 low and supported with price action.

WK Chart of USDJPY (2Y)

WK Chart of USDJPY (2Y)

(The chart includes a typo; it should read bearish case instead of bullish)