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Blog: Yen Moves Suggesting Complacency or Paralysis?

The latest US Commodities Futures Trading Commission (CFTC) data on International Money Markets (IMM) Currency futures positions yielded one big surprise: a sharp weekly swing in yen positions from a net 27,700 contract short to a net 41,300 contract long.

Yen
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Yen

It also showed a 56 percent week-on-week rise in the overall USD net short (vs. JPY, EUR, GBP, CHF, CAD & AUD) to $34.9 billion from $22.36 billion, the highest since June 2008, i.e. very shortly beforethe Lehman crisis precipitated one of the sharpest "risk-off" related rallies in the dollar and an almighty crash in commodity prices.

Over in the commodity space, the net long on WTI Crude Oil futures soared 30 percent on the week to a record 268,600 contracts. And while retail fund flows in recent weeks show a reversal of the flows into stocks and out of bonds seen at the end of last year, the moves lower in 2 and 10-yr Treasury, Bund and Gilt Yields since the crises in the Middle East and North Africa started look to be little more than a modest correction to the sharp yield rises since early November, and only tenuously earn the description "flight to safety." The same applies to the "setback" in European and US equity indices. Hence that sharp swing in the JPY position appears rather anomalous.

The more so, when one considers the following: Japan imports pretty much all of its oil and is also heavily dependent on imports in the food arena; it has a grotesque and seemingly intractable budget deficit and is closing in on a 200 percent debt/gross domestic product ratio; Japan's companies have been reluctant to invest any money in domestic infrastructure during the recovery (the pace is at around 84 percent of pre-recession levels); it is politically gridlocked as evidenced by 5 Prime Ministers in 5 years; it has deeply embedded core deflation, and rises in inflation over the past 15 years have generally resulted in slower consumer spending, while its fixed-interest yields are worse than pitiful.

So was this recent move a sign that: Asian investors are treating the JPY as Europeans treat the Swiss Franc; or was it perhaps an about face on concerns that fiscal year end flows (end of March) advise against being short JPY? A comparison between the yen's performance in 2008 to the past 6 months tends to suggest the latter.

The yen move is however more "happenstance" than anything else, and indeed appears to be generally as overlooked as the fact that the Chinese yuan has appreciated 4.7 percent since July 2010. The rather more material issue is whether markets are being complacent, as they clearly were in the summer of 2008, or are in a state of paralysis, having been overwhelmed by a combination of conflicting ostensibly "familiar" signals, along with an array of very unfamiliar "paradigm changing" signals.

Complacency is surely not the core issue, though the Anglo-Saxon world's assumption that the G7's political and monetary powers will, and can, afford to emphasize measures boosting growth over fighting inflation pressures, relies far too much on the assumption that the individual economies of the G7 are "price setters" rather than "price takers", which their contribution to global GDP growth over the past 5-10 years suggests is false. The blatant "helplessness" of these "high income" countries in the face of popular revolt in North Africa and the Middle East against autocratic and/or oligarchic regimes, driven in no small part by sharp rises in food and energy prices, as well as perniciously high levels of youth unemployment, is reshaping the world even more sharply than the underlying strength of the Asian and latterly Latin American economies, thus generating even greater uncertainty.

The risk is thus that the current ostensible "stability" (in financial markets) is a precursor to a protracted period of much, much greater volatility, and in the longer term a realization that the "risk premium" for lending capital needs to be much, much higher, and therefore government bond yields are much too low.

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The author is Marc Ostwald, strategist at Monument Securities.