‘The Most Important Chart For Investors’ Flashback, And Why USDJPY 120 Is Now Coming Fast

–  “The Most Important Chart For Investors” Flashback, And Why USDJPY 120 Is Now Coming Fast (ZeroHedge, Oct 31, 2014):

Back in late September, we posted what Albert Edwards thought at the time was “The Most Important Chart For Investors” which was quite simply, a chart of the USDJPY. Here is the punchline of what he said:

We have long believed that investors ignore Japan at their peril. Time and time again, investors have missed major global market trends that have been catalysed by Japan. We have felt for some time that a fragile Chinese economy could be pushed over the edge by a further yen devaluation – in many ways a replay of the Asian crisis of 1997. And just as the Chinese real economy data has taken a turn for the worse in August, the yen has slipped below a key 15-year support level against the dollar. This is probably the most important chart investors should focus on. The next phase of global currency wars may have begun.

We have written previously that Japan?s QE and the associated yen weakness could trigger a re-run of the 1997 Asian crisis, only this time sucking in the Chinese renminbi. The yen has just broken below a key long-term support and after a brief technical pull-back, its decline is likely to accelerate. This will trigger a wave of profit-crushing deflation flowing from east to west. Andrew Lapthorne has just written a great note on Japanese equities. He says yen weakness, not corporate self-help, is the key to Nikkei outperformance, with Germany looking particularly vulnerable. It looks as if yen weakness is what we’ve now got!

Staring long and hard at the Yen/$ chart, I think that, in the current circumstances, the yen/$ will head to 120 pretty quickly – perhaps after a short reinvigorating retracement. And, if the dollar’s ascent is given extra impetus by the DXY also breaking out, a decline in the yen below Y120 will see an end to its 30-year uptrend – a trend that has relentlessly exported deflation from the west to Japan. Sound far-fetched? One of the few things I have learnt over 30 years in this industry is that when traders decide the yen/US$ starts to move it can jump by Y10 or Y20 very, very quickly indeed.Considering the BOJ’s overnight move, he was absolutely correct.

So for all those who missed it, here it is again, because it explains not only where the Yen is headed next, but why, sadly, this could well be the end of Japan and the mirage of a recovery that has had everybody hypnotized for the past 6 years.

Albert Edwards Presents “The Most Important Chart For Investors”

Which incidentally has nothing to do with stocks or bonds, and everything to do with all-important FX (which just happens to drive all correlation and risk pairs around the globe thanks to the far greater embedded leverage in FX, and is why all “modern” traders focus almost entirely on the USDJPY and EURUSD).

Specifically, as SocGen’s Albert Edwards notes “we show on the front page chart what I believe to be the key chart investors should be focusing on at present. It shows the yen breaking down against the US dollar. This may be more than just a strong dollar story on the back of Fed tightening however, as it seems the yen has now also broken key support levels against the euro. This is a weak yen story. Though there are good fundamental explanations for recent dollar strength vis-à-vis both the yen and the euro, often commentators like to find a fundamental story to fit market events even when price movements have occurred without any clear fundamental explanation ? for we teenage scribblers (as ex-UK Chancellor Nigel Lawson dismissively called us) all have to fill those column inches of commentary.”

edwards most important chart

Wait, Albert is now a chartist? So it would appear, with a few large caveats:

Sometimes it is very clear to me that instead of fundamentals driving prices, it is the charts or technicals that are important. Hence I have long been an advocate of keeping one eye on the charts to see if a major support or resistance has been broken. The very fact that the markets contain so many followers of technical analysis means that the soothsaying of chartists can actually be self-fulfilling. Nowhere is this more true than in the world of foreign exchange (FX) trading where fundamentals often play a peripheral role, even in the medium term. And in a world where momentum investing has become more ?fashionable?, FX is the one area where a clear market trend is especially seized upon with relish.

We couldn’t agree more, since we ourselves enjoy point out, more often than not, when various algos activate momentum ignition strategies in the USDJPY to push the broader S&P 500 above (never below) key resistance levels. In fact, it was on Zero Hedge where we pointed out last night the extreme oversold level of the Yen. Edwards, however says to ignore this, and instead to focus on what may be historic weakness in the Yen, which in turn will clobber the global economy.

… if I am right and the yen runs sharply lower from here, then this will spell real trouble for the global economy. (Do not be fooled if there is now a pause in yen weakness or even a partial retracement from these levels, as the rapidity of recent moves means the yen is now extremely oversold against the dollar ? i.e. the daily RSI=88. This should be the pause that reinvigorates the new trend).

Why does a rapidly weakening yen spell trouble for the global economy?

First, because the Chinese economy will see a further rise in its already strong real exchange rate, especially if other Asian currencies are pulled down with the sliding yen. This will hurt the Chinese economy which, from August data, appears to be weakening again. The strengthening renminbi will also exacerbate deflationary pressures further.

Second, a weak yen spells trouble for the west as a wave of deflation washes in from the rapidly devaluing east. This reverses a decade long trend. I believe that profits growth is so anaemic in the west that this monetary tightening via strengthening exchange rates could in itself be sufficient to send US and European profits into outright decline and subsequently their economies into recession (via a contraction in the investment spending). That is why this FX technical break is so important

That’s what could happen. Here is why Edwards believes, it will happen.

We have long believed that investors ignore Japan at their peril. Time and time again, investors have missed major global market trends that have been catalysed by Japan. We have felt for some time that a fragile Chinese economy could be pushed over the edge by a further yen devaluation – in many ways a replay of the Asian crisis of 1997. And just as the Chinese real economy data has taken a turn for the worse in August, the yen has slipped below a key 15-year support level against the dollar. This is probably the most important chart investors should focus on. The next phase of global currency wars may have begun.

We have written previously that Japan?s QE and the associated yen weakness could trigger a re-run of the 1997 Asian crisis, only this time sucking in the Chinese renminbi. The yen has just broken below a key long-term support and after a brief technical pull-back, its decline is likely to accelerate. This will trigger a wave of profit-crushing deflation flowing from east to west. Andrew Lapthorne has just written a great note on Japanese equities. He says yen weakness, not corporate self-help, is the key to Nikkei outperformance, with Germany looking particularly vulnerable. It looks as if yen weakness is what we’ve now got!

Staring long and hard at the Yen/$ chart, I think that, in the current circumstances, the yen/$ will head to 120 pretty quickly ? perhaps after a short reinvigorating retracement. And, if the dollar’s ascent is given extra impetus by the DXY also breaking out, a decline in the yen below Y120 will see an end to its 30-year uptrend – a trend that has relentlessly exported deflation from the west to Japan. Sound far-fetched? One of the few things I have learnt over 30 years in this industry is that when traders decide the yen/US$ starts to move it can jump by Y10 or Y20 very, very quickly indeed.

Remember that “shocking” CPI print from last week? If the SocGen strategist is right, prepare for many more such “stunners” as Japan makes deflation-exporting its only business model, one which could well crush the economies of Europe, China, and the US… and Japan! Case in point: recall what just happened to Sony last week. But the all important offset, a rising global stock market, should make it all better at least until the entire economic base is so hollowed out, not even algos can dismisses the record divergence between stock market myth and economic reality.

Edwards’ bottom line: “If a clear break in the yen downwards against both the dollar and euro is occurring, not only will this spell trouble for the beleaguered Chinese economy and exacerbate deflation in the west, but it will also break the spell of German economic dominance.


* * *

And here is what Albert told us moments ago:

The amazing thing is how little interest there is with western investors about Japan and how it effects US or European portfolios

Notwithstanding the fact that it is the 3rd biggest economy in the world by a long way (the same size as Germany and France added together if you look at it the right way ie current exchange rates rather than PPP)

Little understanding out there what yen devaluation means for Chinese renmimbi and how they will be forced to devalue too

ECB money printing will never be able to compete with Japn. The euro might be going down v the dollar but it will be going up against theyen

Little understanding how, not only will eurozone be going into recession and deflation but that Germany will be the weakest economy in zone. Once Germany’s budget deficit starts to rise sharply as a result of their recession the new mad balanced budget act will kick in and they will be cutting spending aggressively. Expect the eurozone to disappear down a black hole!

2 thoughts on “‘The Most Important Chart For Investors’ Flashback, And Why USDJPY 120 Is Now Coming Fast

  1. If the Eurozone goes down a black hole, so goes the US dollar. The majority of the 33% of the world economy that still uses the dollar are those in the Euro Zone.
    Japan’s biggest mistake was to dump the dollar and join the basket of currencies offered by the Eurasian Union……or B.R.I.C.S. The dollar offers a certain protection being used to close international deals, and without it, the real value of the currency becomes apparent. In Japan’s case, they have gone from deflation to hyper inflation. Buying a hamburger in a restaurant now costs 70% more than it did a few months ago.

    The Euro Zone is keeping the dollar afloat. Talk about excessive printing of currency with nothing behind it but ink………..if the dollar loses the Euro zone, it is over for the US.

    If it is over for the US, it will be a nightmare.

  2. If Japan is the world’s third largest economy, God help us. Many of their exports are rejected for radioactivity rates being too high. Their vehicles sell well but they are made overseas.

    Ignore Japan at your own risk? Why don’t they calculate Fukushima?

    This is such rubbish. Japan, for years has had deflation, now they suffer with hyper inflation, since they dumped the dollar. The dollar protected them from their real problem, Fukushima, and it kept their currency relatively stable.

    The currency war has been played out, the game is over. The dollar controlled all international deals, all were closed with dollars. Thanks to Putin, the Eurasian Union, or BRICS, the dollar is now accepted by 33% of the world, down 67% from January 2010. If the Euro falls, so goes the dollar, and Japan.

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