Stocks & the Japanese yen
I’ve had my eye on the Japanese yen the past few days. For years, the yen has been at the center of the “carry trade,” where traders will borrow in yen at near zero interest rates to leverage their investment in markets that are moving higher – like stocks.
The yen has been tracking the S&P 500 very closely all year (see below). When stocks fall, traders borrow yen, sell them for US dollars and use it to buy stocks. When they feel stocks are high and they want to reduce exposure, they reverse the process by selling stocks and purchasing yen to repay their margin loans. This means the yen moves in the opposite direction of stocks when the carry trade is in favor (the chart below shows the value of the US dollar against yen, so it’s flipped). You tend to see the yen begin to change course anywhere from 1 day to a few days before stocks so I’ve been waiting for that turn to occur and I don’t think we’ll see stocks move higher until it does.
Yen (top) & S&P 500 (bottom) – 9 months
Bonds
The recent bounce in bonds has been nice but I’m not confident it will last so I’ve begun to directly hedge the risk of higher interest rates to reduce the impact on bond prices. I would be surprised to see rates move below 2.4% on the 10-year Treasury bond again and we will most likely see rates move back toward 3%+ later this year, into next.
10 year Treasury bond rate – 3 years (currently ~2.60%)
Sugar
After months of waiting, it looks like sugar has finally built a base and broke-out to the upside. Sugar has been in a bear market for 3 years after prices more than tripled and attracted a slew of marginal producers that have dumped a ton of supply on the market. A few weeks ago, reports showed that this year’s surplus will be much lower than initially anticipated as demand from Asia continues to rise, creating the jump in price. The 2013-2014 harvest is projected to come in at a small surplus which many in the industry think could easily disappear if demand continues at this pace. As you can see, it can take years for a market to work through excess supply and you can be sure to expect smaller producers and traders to jump at this recent pop as an opportunity to sell. I think we’ll see sugar retrace some of this move – maybe a 5% – 8% pullback. I’ll be looking to build a position if it does.
Sugar – 4 years
Gold
Gold is starting to look like it will make another leg lower. I’m not expecting it to find a bottom until early/mid 2014 anyway. I put the probability that we’ve seen the low at 33%; 67% we’ll still see a new low below 1180.
Gold – 9 months
Thanks for following!
-Nick