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Monday, 30 December 2013

year-end opportunities in eurusd and Japan

Right now I'm quite short fixed income in the US and Japan - what you'd have called a risk-on position a year ago - and so selling eurusd looks like a good offsetting trade. We're just reaching a nice 5 year trend line, so it's possible to set quite a tight stop on the upside :


The situation in Turkey is a potential catalyst for a selloff in eurusd (you can imagine contagion into the Euro if things get out of control). There seems to be some end-of-year selling of dollars at the moment, and from a medium term perspective the economic strength is definitely clearer in the US than in the eurozone, so this looks like a good entry point for several reasons. Anyway, I'm selling it around here with a stop not too far above that trend line. We'll see if it holds. 

In Japan I'm switching from short yen to long Nikkei / short JGBs. I've just taken profit on some usdjpy as the trade now looks crowded and possibly overbought in the short term. I prefer owning high dividend Nikkei stocks. The trading companies are absurdly cheap (Marubeni, Mitsui and Sumitomo have forward p/es around 6.5 and dividend yields of 3.5%) and the megabanks aren't much more expensive. I'm reminded of the situation in the UK 3 years ago : retail investors bought boring, high dividend, low p/e stocks in their ISAs (tax free wrapper accounts) when they realised rates wouldn't rise for years and high inflation would penalise cash deposits. NISAs are the Japanese equivalent and have just started trading. If I was a Japanese pensioner sitting on a lot of cash and worried by rising inflation I'd want the safest, most boring high income stocks I could think of, preferably names I'd known for years, all held in a tax free account. Buying the trading companies in a NISA fits the bill perfectly. They've been outperforming the index recently, as you'd expect as the NISA deadline approaches. 

JGBs have no obvious reason to sell off since the BoJ keeps buying, but the chart looks terrible. The banks have been buying put options, which says a lot (the "stupid gaijin" trade), and everyone is talking about the BoJ increasing their purchases sometime next year, so that risk is partly in the price already. It certainly isn't yet a widely held position, and I think we could trade another 10-15bps higher quite easily. 

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