Knights That Go Yen

Every bar in every town in every wild remote unforgiving desolate landscape has one. No matter how ghostly the neighbourhood, how empty the streets, how dusty the tables and chairs in the room with the cracked panelling, peeling paint, and greased windows, there at the back of every bar will be a sole figure hunched over a laboured glass, stretching time until, like a curious statue, they catch the eye of the poor soul who has just walked in with a medusa stare. The victim's small vestigial ganglion of primative neurones that is their last chance of escape, cannot muster enough adrenalin to persuade the rest of their stunned nervous system to register blind panic and RUN. It is too late, for soon the creature with the glass will open its mouth and slur in a drawl:

"Did ah tell you about the days I used to run a Hedge Fund?"

There was a show in the UK called the Fast Show and one of the characters was "Archie" he was the UK's version of the creature described above. And we sorely wish he had been the early 1990s Macro Hedge fund manager...

"Hardest game in the world, yer hedge fund managing. But there was yer glory days too. I can remember when DollarYen used to move. An' I don't mean yer poxy little wobbles of today. No. I mean REALLY move. We was all at it in them days, DollarYen that is. 88 to 140 no problem, would 'appen in an afternoon. We made boat loads. RKO's was me favourite. Only just come out then an' no one knew how to price 'em proper and we just took the piss. But it was tough. Lost it all the next week on some correlation trade that didn't correlate longer than it took me to put the trade on. Hardest game in the world that hedge fund game... Do you want to get me a drink?"

Yes... USD/JPY was the weapon of choice for many an old Hedge fund warrior.

But TMM are detecting a deep infrasound. A low rumble mostly detectable through the feet rather than the ears. And its intensity is growing as USD/JPY climbs higher, accompanied by ghostly clanks of armour and distant warrior cries as the call to arms rejoins across the world, summoning forth the once brave and mighty from their slumbering hollows, bars and Bide-Awee rest homes for Hedge fund managers, to once again rise and fight the old foe... THE YEN.

TMM have been lucky enough to have made decent cash on the move higher since the end of September, but in true dedication to one of their main mottos - "USDJPY will be not be easy" - have taken off most of their exposure, only really having a token position to "intellectually be in it". The recent commentary from PM-to-be Abe that FX intervention won't work, and the seeming clarification that a change in the BoJ Law is not in the LDP manifesto have obviously taken some of the shine off the trade. But TMM think it's a bit more subtle than that as he also continued to pile the pressure on the BoJ to meet a 2% inflation target while arguing for a fiscal response in concert with monetary policy.

Now, orthodoxy would suggest that loose fiscal policy coupled with loose monetary policy in the context of a very poor Balance of Payments position (see chart below) is bad for a currency as expected returns on domestic assets are not enough (as monetary policy prevents them from rising) to bring in capital flows. Similarly, government policies aimed at encouraging domestic investors to send funds abroad for M&A/FDI are keeping the needle pointing away. You don't need FX intervention to weaken a currency if the fundamentals look like this - it will weaken anyway.


Up until recently, TMM had been sceptical of the "short Yen" trade that has continually confounded punters, partially a result of the fact that US rates are so low. So it is clearly worth questioning why this time is likely to be any different? And TMM reckon that the above alignment of policies mean that domestic investors, hitherto the primary driver of the rates/FX relationship, have less incentive to own Yen as the rates relationship is really a "real rate" relationship - and pushing for a 2% inflation target de jure means a rise in expected inflation and commensurate fall in Japanese real rates. Shirakawa & Co. may not believe that that is possible, but the evidence in the US & UK suggests that aggressive easing has indeed kept inflation expectations high. The other consistent buyer of the Yen - exporters, who have consistently hedged receipts have discovered those receipts evaporating in the face of Korean competition and the need to import energy appearing to have become more structural. TMM must admit to being very surprised that the Nuclear plants have not been quietly switched back on.

It almost seems to TMM as Keidanren have finally spurred The Establishment to accept that protecting The Post Office (and pensions) is no longer as important as the potential collapse of Japan Inc. And if that is so, it would arguably be the biggest change to macroeconomic policymaking in Japan for a decade. Not to be ignored.

However...It is the end of November. And the election is in just over two weeks. The move has been dramatic, and *everybody* TMM speak to loves the trade. Which makes TMM nervous, as profit taking into yearend takes hold, the fact that many structures have been put on such as RKOs which have caused people's exposure to evaporate and then buy spot at poor levels. And it's not as if the policy is going to be implemented in two weeks time. TMM therefore reckon that the risk of a Yen washout in the near term probably outweighs the opportunity cost of "missing the move" and have trimmed most of their position, with a view to putting it back on 30th December in anticipation of the traditional piling on of New Year 2013 trades.