The Art of the Deal

While Americans celebrate Thanksgiving, their currency is going haywire. Dollar strength as far as the eye can see, as if we were back to the only haven in the world. Amazingly, this is all down to one man, and his name is conveniently Trump, Donald Trump. Some leaders of other countries are justifiably concerned, particularly in the EM space. Others are more stoic about it, like China. Again others cannot believe their luck, such as Europe and Japan.

Let’s touch on Japan for a minute here. As you will recall, Expertise Asia has had an ultra-bearish call on the Yen from late 2012, when Abenomics was in its inauguration and the Yen was below 80 against the dollar. While the Abe/Kuroda duo did a fine job debasing their currency by 50%+, to a level of above 125 in the following years, the better part of this year saw a setback to the forecast.

As the traditional safe haven option in times of extensive risk the Yen rallied into the risk market correction in early 2016 and never looked back until hitting 100 during the summer season, at the time of the Brexit referendum to be exact. Every attempt to bounce back from there and re-weaken considerably was in vain. The central bank didn’t play ball and resorted to a more muted language. This space’s ultimate target of 150 was out of sight.

Only briefly though, might I add. Some of the readers probably concluded at the time that this writer had finally lost it, but as you are aware, the call has not been changed throughout that drought. On the contrary, the fundamentals are still very much in favour of a massive Yen depreciation over time, and the sturdy bottom built through the summer is now serving as a perfect base for the FX to gain momentum again.

The dollar strength’s backwind is obviously working wonders here. The Yen has now eclipsed the 113 level, a drop of 10 Yen in just the 2 1/2 weeks since the US election. So this is already going very fast. Volatility is obviously on and a precursor to erratic behaviour, but don’t be surprised if the exchange rate were to move towards 120 quickly. At least technically there is no material resistance until such reading. Lots of long positions to be cut.

But wasn’t there the issue of that black list the US Treasury department has put together? It is to point out the currency manipulators of this world, still potential ones mind you, the ones that make it so hard for American exporters to offer their ware and services. I don’t need to remind you of the rhetoric of the now president-elect, including the one referencing Japan. Trade war was all over the horizon then.

Lucky that extreme campaign rhetoric almost never gets put into action. The 10% drop in the Yen, as well as material depreciation of other potential manipulators like China, since the election hasn’t exactly prompted Donald Trump to make use of his Twitter account, at least not on currency manipulation. I am sure it’s being noted in Washington, or in New York, but even the markets feel no intimidation and are going outright directional.

On top of this, Shinzo Abe landed a coup by going straight to the lion’s den. In a private meeting a few days ago, he saw Trump and paid his respects to the incoming president, as the first foreign leader to do so and preempting everybody else. No bashing or finger-pointing then. Having announced the withdrawal of the US from TPP and driven most of Asia into China’s welcoming arms Trump knows he will need a very cosy relationship with Tokyo.

That’s how geopolitics works. Abe seems to have just catapulted himself from an also-ran within TPP and a very potential currency manipulator into the highest ranking US ambassador in Asia Pacific. I highly doubt Trump’s focus will be on a falling Yen, something Abe desperately needs. For a year now Japan’s exports have declined on double-digit monthly percentage rates. The only reason for a trade surplus is that imports are declining even faster.

Abe will use his political capital to further bring the currency down, as stealthily as possible and as much as possible. The Abenomics disciples are far from having given up to complete their mission, as much of a mission impossible as it may be in the end. But his remit, or should we say his end of the bargain, is to make sure he keeps this unsinkable aircraft carrier from actually sinking.

What Abe’s own target on the Yen is, whether it’s 150 or whether he actually has one in mind, I cannot know. All I know is he wants its value down, and he appears to pull all the right strings to make it happen. I haven’t read the Art of the Deal, but this could be something from the book. The only difference is Abe is doing most of the dealing, and not Trump’s ghost writer.