Is the Abenomics Party Starting to End?

May 22, 2014

What goes up must come down - at least in the real world of ordinary physics - and this reality seems to be setting in on USDJPY.

USDJPY Taper Confusion Starting to Resolve Down

My view turned bullish on USDJPY back in the dark days of 2011 and remains bullish - very bullish - for the long-term, but as I have been warning my subscribers for many months now, it is likely that the near/medium-term may be less kind to USDJPY.

After months of confused coiling, this bearish tactical view on USDJPY appears to be gaining support on USDJPY's recent break below its multi-month Symmetrical Triangle.

This budding breakdown in USDJPY is worth thinking about considering that the overwhelmingly weak yen (JPYUSD) was the carry for much of 2013's monster rally in stocks as shown by the shared chart of USDJPY (orange), the Nikkei (red) and the S&P (blue) in 2013.

Is the Abenomics Party Coming to An End?

Everyone is so focused on the Fed relative to the future of the U.S. equity markets, but it is equally important to remember the role of the BOJ relative to last year's 30%+ move up in U.S. equities with the Nikkei's more than 80% move up in 6 months providing the most compelling reason why.

After all, the November 2012 through May 2013 rally in the Nikkei was comparable to the S&P's initial revival reaction to QE1. 

Against the backdrop of a still-supportive Fed, the S&P piggy-backed that "carry trade" move as shown well by the Abenomics chart above.

​What is starting to stand out in that chart is the Abenomics uptrend breach in USDJPY and the Nikkei. This speaks to and supports one of my favorite themes for 2014 and this is a repricing of risk as the traditional safe haven yen has been setting up to rally similar to what is happening with U.S. Treasurys.

Keeping this repricing of risk simple here, it is probably the start of some serious downside volatility for both USDJPY and the Nikkei as each begins to recoil from the unnatural and unsustainable spike up made in each in 2013.

It is this threat of the Abenomics party starting to end, then, that should be on the mind of all investors considering it is likely the S&P will follow the USDJPY and the Nikkei down.

As always, thank you for taking the time to catch up on my thinking.


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