March 5, 2013

By: Tres Knippa, Member Chicago Mercantile Exchange

During the circus of European politics, the Yen enjoyed a temporary rally.  But that is only a distraction from the greater issue: an international race to the bottom in political leadership and irresponsible fiscal policy.

Yen Rally During Italian ElectionsHowdy, from Chicago. What a week it was in the yen!  Monday saw traders unwind massive long-Euro, short-Yen positions on the heels of the clown show known as the Italian elections. The yen buying pushed it to a much stronger position to the USD but by the end of the week, those gains to the USD vanished and yen weakness returned on Friday. It is my opinion that any recovery in the yen will be short lived. I think a target of 120 yen to the USD is very reasonable by the end of 2013 .

Betting on Shinzo Abe’s failure, a client of mine in Tokyo made a very interesting observation, and I want to thank him for it. What if I wanted to take a position assuming that Abe’s plans won’t work? Should we look for the yen to reverse on any signs of political pressure on Shinzo Abe? Perhaps the best way to make this trade is owning put options on the Nikkei. Even if Abe steps down (as Japanese leaders have been known to do) the BOJ leaders would remain in office and we would most likely see continuation of extremely loose monetary policy. Is it possible to have a weak yen AND a weak stock market? In my opinion……….it is absolutely possible because there are a lot more issues causing a stagnant Japanese economy that a weak yen alone will not fix. I know it sounds funny to talk about Abe stepping aside considering his 70% approval rating, but trying to think about this game a few moves ahead is always prudent. Thanks Andrew.

The world will now have to come to grips with the fact that the Italians and the French will most likely be deadlocked in a contest of who can make more bad decisions than the other. How do the Italians expect to be taken seriously on the world stage when the electorate votes for Beppe Grillo and Silvio Berlusconi? We are seeing the voter sponsored dismantling of one of the great countries in history. Europe is beginning Act II of an economic tragedy and now it is turning into a political tragedy as well. Do we hear the voice of Alexis de Toqueville?