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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: mishedlo who wrote (70045)9/22/2006 4:24:22 AM
From: YanivBA  Read Replies (2) of 110194
 
I think you are barking at the wrong tree here Mish. The Yen is not going to sink much farther. I expect that a global liquidity contraction should support the Yen as the carry trade unwinds. As you wrote in "Nightmare Carry Trade Scenario":

Nightmare Scenario

I view the nightmare scenario something like the following.
1. End of quantitative easing (QE) in Japan
2. End of ZIRP in Japan (Rising interest rates)
3. Rising interest rates in Europe
4. Falling interest rates in the US
5. Tightening credit in the US
6. A rising YEN vs. the US$

Now after May we know that a liquidity contraction is good for the dollar because when market participants exit positions they request dollars in return. We also now that a severe liquidity contraction should be bullish for the Yen as market participants have funded leveraged positions by borrowing Yen. So what is it going to be? Yen bullish or Dollar bullish?

I really don’t have a strong opinion here. If I am pressed I would say it would chop violently to burn both leveraged sides but be generally range bound. What I do know is who does not have a bullish argument. The Euro and emerging markets currencies. I say a liquidity contraction is going to be Euro bearish and emerging markets bearish. That should be enough to burn the carry trade and still be consistent with a US bond bull.

Let us technically consider who should be weaker going forward, the feeble Yen or the almighty Euro?



A falling wedge. A bullish MACD histogram divergence. An extreme reading on the RSI. Are we going parabolic here? If we are where is the sentiment?

I say Mish, quit picking on the Yen. Go back to "Nightmare Carry Trade Scenario".
Rewrite:

1. Falling commodities
2. Falling emerging markets
3. Rising interest rates in Japan
4. Falling long interest rates in the US.
5. Falling Mortgage Backed Securities ( 55% of Pimco is MBS )
6. Unwinding yield inversion.
7. A falling Euro.

YanivBA.
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