Thursday

Trade

With all the high frequency computer trading going on, indices and currencies move in tandem. USD/Yen goes down, Nikkei goes down. The good thing is this algorithm is the primary over riding factor determining the Nikkei’s move overnight. So even if the Dow goes up 2%, the Nikkei could only manage a miserly 0.5-0.7% rise overnight (depending on what the Yen does, and the Yen is obsessed with breaking the 83 mark so the Nikkei has been suicidal lately). So going long Nikkei before US-close/Japan-open on a Dow up night is usually a good trade. When the Japanese wakes up to a 2% rally on the Dow overnight, they buy and get the Nikkei up to a more respectable rally.

The same thing is happening again tonight. Because of our bearish views, we have been concern that a crash would result in a spike in the Yen (conventionally, yen is a panic currency just like gold is a panic metal) -thus exacerbating any decline. We have been debating this, and suspect this relationship may breakdown - NOTE: this is pure conjecture at this stage. The rationale behind the hypothesis is - pre GFC, there were huge carry trades where investors borrowed in Japan (negligible interest rates) to invest overseas (just to give an example, you borrowed $1m from Japan at 1% interest and invested it in Australian bank stocks earning 5% dividend and huge capital gains). Come GFC, everything crashed and you get margin called and so you go into liquidation mode, and subsequently repatriate your funds back to Japan (requiring you to buy Yen, hence Yen goes up).

Currently, interest rates are low in most countries - so there’s less carry trade with Japan. And there is a huge technical crowd going long the Yen short USD (Apparently there is only a 5% long interest in the USD - there is no love there. Whilst we would love to long the USD and think it would probably be a profitable trade at least in the short term, we try our best not to trade against fundamentals). SO, when markets turn, we suspect the yen will go down paradoxically. It may need to head lower first to trap the Yen bulls - we would imagine everyone jumping in once 83c is broken (just to clarify: USD/Yen down = strong yen).

USD Yen

On that note:

Short DJ 10790 $5/point

Long Nikkei 9375 $5/point