* this is not a trade recommendation and for educational purpose only. please do your own research.
MACRO case study
… slowly, then suddenly…
What happened on Monday was like that. Slowly, then heavy one-way-flow. Japanese Yen was sold off aggressively across the board, mainly vs CAD and AUD, then correlation trades started to pile in, USDJPY, GBPJPY, EURJPY etc.
CADJPY, a pair I usually do not follow closely tbh, had already seen a near +6% rally since Sep21st.
But Monday brought some extra attention, acceleration, waves of stops, new longs, new hedged and what not. Fast money as well as most likely a ton of Japanese retail accounts.
On my weekend blog I already mentioned the “back-to-Earth” -11% sell-off in Nikkei from Sep 14th into last week mostly driven by the fact Japan is a major energy importer and since NatGas, Coal and Crude oil had been soaring and created a global energy crisis, it obviously hurts Japan.
Let’s dial back
Japan is a major importer and consumer of energies in the world:
- Fifth largest oil consumer
- Fourth largest oil importer
- Largest liquified natural gas (LNG) importer
- Third largest coal importer
Since the large earthquake and tsunami event in 2011, which also caused the nuclear reactor accident in Fukushima, Japan scaled back from nuclear power and is more reliable on coal and natural gas, despite the great efforts to increase renewable energies.
Recovery from CV19 lockdown
Japan handled the delayed Olympic games with super caution, sadly with near empty stadiums. Eventually the 7d MA delta of new cases peaked end of August from 23k all the way down to 10months low of 900 as of writing.
That also meant reopening the economy, less restrictions, more travel and productions… and increase in demand for energy.
Combined better outlook with CV19 cases dropping sharply, vaccination progress improving, a new Prime Minister, investors pouring money back into Japan, Nikkei rallied sharply from 27k to near 31k +14% within a few weeks.
But, with the sudden soaring energy costs and an unfolding energy crisis, market showed its unforgiving ugly face and markets don’t like uncertainties:
Business optimism fading
Business confidence was never as strong as in the US or Europe. Services sector continues to be in contraction since 20 months (!), Manufacturing sector peaked in April at 53.6, rolled over early and fell to currently 7months low 51.5:
Large part of the weakening outlook must be contributed to the rising energy prices, resulting in worse than expected economic data releases, which is shown here in the CESI table from the dashboard, the surprise index literally crashed from +150 in June to -82 in September and is still at -68 last Friday:
Japanese Yen under selling pressure
…slowly, then suddenly…
Here is a quick glance short term chart I tweeted earlier, showing the correlation between Crude oil and various JPY pairs, biggest gainer CADJPY, AUDJPY. Could have used Coal monster rally too as a comparison, BOTH surged sharply the last few days/weeks.
Canada, a key energy exporter and Japan a major importer. Rate differentials moved up sharply too “leading the way” so to speak. CADJPY had been range bound between 85-88, but finally got strong momentum, then the technical break out and Monday spike.
Usually this is a classic RiskON/RiskOFF pair, even though the carry aspect has been eroded since a long time. But in “normal times” = reflationary good recovery demand for commodities, China growing etc, leading to a stronger AUDJPY, visa verse, in a global slowdown outlook, this pair sees weakness.
But now, it is a slightly different environment: The bottlenecks in global ports, China real estate default problems, soaring energy costs should be a concern for an eventual global economic slowdown outlook. On the other hand, immense shortage of inventories led to a short squeeze in Natural Gas, Coal, and now Crude oil is surging too.
Australia is a large coal exporter as well as LNG exporter.
So now, this pair has been very volatile between 78-82 in 4 rollercoaster waves, but found strong demand now with surging energy costs. 82 was a major stop loss trigger Monday. Rate differentials were also very much supportive and “leading” the way.
COAL importers / exporters
* as always, please check the DashBoard for the bigger Macro picture and connect the dots
Das war’s , thanks for reading, vielen Dank und good luck, Kai