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28 May 2013
Flash: The yen after the Nikkei crash - Nomura
FXstreet.com (Barcelona) - Following Bernanke's comments, Nomura strategists recommended a fresh long USD/JPY position around the 102.80 level.
They note that it was not a part of the game-play that the Nikkei would immediately proceed to gap violently lower. In fact, a part of the rationale for the tactical trade was the positive feedback loop between Nikkei gains and USD/JPY appreciation They write, “This part of the rationale is now clearly in question. The Nikkei is off more than 10% from its highs, and it would be foolish to rule out a further correction given the extent of the rally.” That said, they feel that the Nikkei is still up a few percent in May.
Hence, they feel that if spot does not go further lower, hedge rebalancing at the end of the month may still be USD/JPY supportive and in this context, it is interesting to observe that USD/JPY has been much more resilient than the Nikkei. They add that while the Nikkei has given back most of its peak MTD gains (12%), USD/JPY is holding on to most of its MTD gains (up near 4%, versus a peak of slightly more than 5%). Further, since offshore investors have been heavily involved in both the Nikkei long and the yen short trade, it is interesting the degree to which USD/JPY has been holding up.
They write, “We are long USD/JPY with a stop at 100.50. We are inclined to stick to this position, although it could be vulnerable to further Nikkei weakness.” Their core view is that retail demand for Japanese stocks should eventually support the market, and they are actually encouraged by the price action in USD/JPY given the Nikkei volatility and the reduction in yen positions going into the long weekend. Indeed, their daily data show that Japanese retail investors are still net buyers of Japanese equity toshins after the sharp fall in the Nikkei – they were net buyers of JPY5.5bn on Thursday and JPY20.9bn on Friday last week, against an average daily inflow of JPY20.6bn.
They finish by commenting, “Our original target for the position was 108.50. However, we now believe that is probably too ambitious, given the recent market volatility. But a test of the highs above 103 seem entirely possible if the Nikkei starts to grind higher and if US yields continue to edge higher. We will reevaluate the position on a retest of the highs.”
They note that it was not a part of the game-play that the Nikkei would immediately proceed to gap violently lower. In fact, a part of the rationale for the tactical trade was the positive feedback loop between Nikkei gains and USD/JPY appreciation They write, “This part of the rationale is now clearly in question. The Nikkei is off more than 10% from its highs, and it would be foolish to rule out a further correction given the extent of the rally.” That said, they feel that the Nikkei is still up a few percent in May.
Hence, they feel that if spot does not go further lower, hedge rebalancing at the end of the month may still be USD/JPY supportive and in this context, it is interesting to observe that USD/JPY has been much more resilient than the Nikkei. They add that while the Nikkei has given back most of its peak MTD gains (12%), USD/JPY is holding on to most of its MTD gains (up near 4%, versus a peak of slightly more than 5%). Further, since offshore investors have been heavily involved in both the Nikkei long and the yen short trade, it is interesting the degree to which USD/JPY has been holding up.
They write, “We are long USD/JPY with a stop at 100.50. We are inclined to stick to this position, although it could be vulnerable to further Nikkei weakness.” Their core view is that retail demand for Japanese stocks should eventually support the market, and they are actually encouraged by the price action in USD/JPY given the Nikkei volatility and the reduction in yen positions going into the long weekend. Indeed, their daily data show that Japanese retail investors are still net buyers of Japanese equity toshins after the sharp fall in the Nikkei – they were net buyers of JPY5.5bn on Thursday and JPY20.9bn on Friday last week, against an average daily inflow of JPY20.6bn.
They finish by commenting, “Our original target for the position was 108.50. However, we now believe that is probably too ambitious, given the recent market volatility. But a test of the highs above 103 seem entirely possible if the Nikkei starts to grind higher and if US yields continue to edge higher. We will reevaluate the position on a retest of the highs.”