Japan's monetary policy - Part 1 - 25th November 2014

The Bank of Japan Act states that the monetary policy should be "aimed at achieving price stability, thereby contributing to the sound development of the national economy." In January 2013 the BOJ set this price stability target at 2% in yearly rate of change in the consumer price index (CPI), and "has made a commitment to achieving this target at the earliest possible time" (that's a nice way to set a deadline). Pretty similar to the ECB's mandate.


Japan's one and only real threat on price stability is deflation. Actually if you want to simplify the story, you could say that Japan's sole true economic problem is deflation. Since the mid 1980's, Japan has tried hard to fight deflation, with a round of heavy interest rate cuts between 1985 and 1988, slain from over 8% down to 0%.



Highly educated and serious people with cuff-links and Italian shoes have identified a number of causes for Japan's never-ending deflation issue.

First they said that the Japanese save too much. It is true that there is a general tendency to invest more in life insurance and pension funds than buying stuff on credit. But this is a lot less true for the generations born after the postwar baby-boom.

Even if we assuming that consumption is low in Japan, is it possible that a population investing in low-risk saving instruments cause deflation ? 

Consumer credit: 0% for 30 days, then 4.7% to 18%

Maybe it is. Our experts simply said that a high saving rate leads to low consumption. But looking at the World Bank numbers, Japan's consumption rate is similar to Western European countries. And if you have a chance to travel to Japan you will easily notice that consumption and consumer credit are doing pretty good. The picture to the right is a advertisement that you will see everywhere in the subway of Tokyo and every major city : borrowing 50 000 dollars at 18% is easier than 1 2 3 in Japan. And next to these ads you will see those of lawyers proposing free counseling for people who can't pay their debts. 


Moreover, it is widely known that Japanese banks and funds invest mainly in yen-denominated instruments, thus creating demand for the domestic currency. For one year, the Bank of Japan has been running the world's largest Quantitative Easing (aka money printing) program, buying 100% of newly issued governments bonds (JGB). But all this freshly printed money flowing into the Japanese financial ecosystem is not helping Prime Minister Abe in his quest to fight deflation.


Japan is in what they call a "liquidity trap", a situation where interest rates are at zero but where people keep saving anyway. If you think about it, would you decide to spend all your savings just because rates are low ? What's true is that low rates in Japan have had a positive effect on consumption in that you can buy a house with a mortgage rate of 1% or less.
Such a liquidity trap situation is said to cause a fall in the velocity of circulation of money and can lead to deflation.
Here's how it works: if the interest rates on financial assets are high, people will not want to hold cash, they rather try to exchange it for goods or financial assets: velocity is high and money demand is low, causing inflation. On the contrary, if interest rates are low, velocity is low and money demand is high, causing deflation. In such a case, increasing the money supply will not necessarily cause inflation...This is where Japan is right now.



A second probable cause was the consumption tax hike in 1997, which killed nascent signs of recovery. If that's true, then Abenomics could be dangerous -the plan is to raise the tax to 10% (from 5% last year, 8% this year). A sales tax hike can be used to artificially inflate consumer price levels.  If you strip out the impact of Abe's tax hike in March, consumer prices grew 1% versus the 2.7% news headline number. But the actual impact of such a hike is quite obvious:

higher prices with same revenue = less consumption 

This is what's happening. Isetan, a major department store chain, reported a double-digit decline in sales in the days following the hike. Sales of new homes and cars have dropped sharply as well -over 13% year-on-year. If you are in a liquidity trap and instead of boosting consumption you raise the tax, then you're offsetting the potential inflationary impact of QE. We know that the 1997 tax hike was followed by a recession and aggravated deflation.


The last mentioned cause is the Yen appreciation against the dollar. This is hardly being developed, and for some reason few detail the impact of the Plaza Accord.

...To be continued in Part 2...

Quick market overview - 24th November 2014

What's up on this quiet Monday?

Volumes are low, ADX numbers are declining across the board, and it's Monday, so the best thing to do now is to stay away from your charts and not be tempted to place a trade.

Wait until when? That we don't know. If you want to surf a wave, might as well be a strong one, otherwise you won't have any speed and end up falling into the water. I know that metaphors are annoying and this one is not my best piece of work, but on the bright side it has the advantage of being clear: if you try to get rich now you'll die trying. Word up.


On the charts

All the trends are unchanged: yen is free falling, USD is on its way to the top (!), new records are being made almost everyday on SPX and Nikkei. Again there is political will behind those trends, not free markets or demand/supply law.

Looking into details:
- Nikkei is still fighting with the 17 500 resistance levels. Wait for a break.
- USDJPY peaked at 119 and is now in a range between 117,400 and 118,400. Wait for Nikkei to break to trade.
- EURJPY was rejected rather strongly at 149 after its incredible climb from 135 (that's 1 400 pips in one month...). This pair reacted more than USDJPY because the Euro is getting slammed. As I suggested, EURUSD long at 1,25 was not the best trade ever. All the people who saw a bottom there are now 100 pips in the red. I didn't know that the pair was going lower, I just wanted to avoid trading a low volume counter-trend move.
- SPX is above 2060 and never looks tired. The 'dip' to 1800 last month gave it enough power to continue climbing and nothing seems to be in its way.

Beaujolais and USD/JPY - 21st November 2014

Le Beaujolais Nouveau est arrivé. Have you tried it ? This year, this young wine from the Beaujolais region in the North of Lyon, East of France, is extremely fruity and absolutely delicious. The summer was rainy and the Autumn hot and sunny, but at the end of the day the grape had everything it needs to make great wine.

What about the USD/JPY ? Well... not much. As seen before, the pair is stuck under a resistance zone, and with declining volumes it doesn't look like it is ready to break through it yet. We'll have to wait for daily RSI to move out of the overbought zone before looking for a new long opportunity.

The Nikkei is in a range between 17,000 and 17,500. The key is to wait for the range to be broken. You could trade this range using an oscillator like Stochastics, but I don't do that. Why? Range trading is interesting in that you think that you can easily manage your risk: the range is between x and x+1, so all you have to do is go long at x with a stop at x-1. But, just for you, Abe is interviewed by a newspaper and declares that "Japan will fight deflation by all means necessary" (nothing new really) and that's enough for your pair to react and trigger your stop, going as low as x-1.5 before bouncing back into the range. Frustrating.

My point? Tight stops are dangerously subject to any noise caused by an uninspired headline. Trading smaller amounts with larger stops helps you avoid news-related noise and stay in the trend.

USD/JPY - 20th November 2014

As expected (like you can expect something from the market), the Nikkei and the USDJPY pair are in a rather strong resistance zone.

The Nikkei is taking a brake below 17 500 with daily RSI and stochastics moving out of the overbought region. Ichimoku's tenkan line is playing as support line and ADX is pointing downwards. This could last hours, days or weeks, but now is a time of seesaw and not a good time to place a trade.

The USDJPY pair is showing few signs of tiredness. Daily ADX is above 50 and pointing up. However round numbers are often psychological thresholds, all the more when it's a level that hasn't been seen in a long time. In this case, we just hit 119 and the pair was rejected. The current daily candle starts to look like a doji. After the incredible rise over the week end of November 1st, we could (maybe) see the pair fill the gap, at least to find support at 113,700 (Fibonacci 38%).

Anyway, the resistance we had talked about in the previous post has played, and the bullish trend is still in place. The rest is nothing but speculation. You don't want to trade here obviously, but simply wait for the pair to show that the brake is over and it's time to continue climbing.


About EUR/USD
Twitter is getting excited about the Euro which has bottomed. How can you tell ? 1.25 is certainly a strong support zone, but the no higher high or higher low has been made. Ichimoku is very red and ADX is around 19 and down. If you are a bottom caller, then go ahead and trust your crystal ball to go long here.

Nikkei - 19th November 2014

Today is my wife's birthday, so I'll keep it short ! There is nothing really new anyway.

The Nikkei is still stuck in the 17 400 zone. Again, this is a relatively strong resistance zone that was pivotal a few times in 2007, and it is the last one before the 18 200/18 400 high of June 2006.

On a monthly chart all the indicators/oscillators are in the overbought region and warn of a retracement, which will probably happen in the 18 200 zone as stated above.

No doubt on the trend: don't try to short this (or the USD JPY pair). But now is not the best time to trade this.

Short and concise. 

Japan's QE - Some thoughts

We know that Japan's QE program has been triple that of the U.S Fed for a little bit more than one year, until last week when it was even increased again. The BOJ is now buying 100% of newly issued Japanese government bonds (JGB).

I read somewhere that this situation equates to Japan using printers and copy machines to print and counterfeit Yen all day to pay off their debts. I understand this point of view, if you are a Westerner who has carefully learned his economy classes: open and free markets, open and free competition.

But living in Japan taught me to look at things a bit differently. In this case things are simply (unofficially) going back to normal: a country's central bank buying its own government bonds to pay debts and fund its development is not blasphemous. And the current system we see in the West where privately-owned financial institutions charge interests to a country and are paid with taxpayers' money is not that old (20th century) anyway.

One of Japan's (not so) secret weapon that allowed them to stay afloat after the bubble burst is low-interest domestically-owned debt. Until the 2008 crisis, Japanese debt was mainly owned by Japanese financial institutions and pension funds. After the shock many smaller banks, local banks and funds either went bankrupt of couldn't afford not to sell assets to cover their needs of cash. Bonds were sold, pushing yields higher, and when the financial system was revived, financial institutions preferred to invest in the equity markets.
Now the BOJ is buying JGBs to push bond prices up and mechanically drag yields down. Is that really surprising?

During 20 years of deflation and low economic growth, keeping interest rates to the floor and keeping debt in the country was the only solution for Japan to survive and keep investing in its own development, education, roads, infrastructure, health etc. What other bank would have wanted to buy no-risk 0.1% yielding bond anyway? Goldman Sachs? Lehman Brothers? A Japanese pension fund, paying 0.1% interest to the Japanese Government to fund retirement pensions of hard-working Japanese taxpayers, that makes a lot more sense. Especially in a country where there is a sense of social-consciousness and responsibility in the economic and financial worlds.
This debt-management strategy is one of Japan's way to do what I consider to be "socialist capitalism": free market capitalism is the rule, but it has to serve the best interest of the country.

And it works. There is no welfare in Japan, because there are jobs; lots of jobs, and jobs that Westerners consider useless: they still have cashiers in 2014 and even hire people to welcome you and guide you to the right line in the bank. That's another side of Japan's socialist capitalism. There are many others, and I might write about that in details.

Anyway, I read a lot of headlines recently, saying that Japan is over. Please come to Japan and judge by yourself. If this is a country that is over, I guess many others wish they were over too, with impeccable roads, hospitals everywhere, the best public transportation system in the world, top notch research and development in universities and major companies...

USD/JPY - 17th November 2014

Japan officially enters recession, posting its second straight quarter of negative growth. The news weakened the yen while the Nikkei, even though it coughed a bit, stays near its 5 year highs. Actually the Nikkei simply hit a resistance zone (that I mentioned in my previous Nikkei post) around 17 440 which has been a turbulence zone since the 1990's and that rejected the Nikkei in April 2006 and November 2007. Coincidence or not, this modest red candle happened at a key level and was triggered by bad economic news.

BUT! I must tell you that in my humble opinion, if Japan had announced its GDP growing by 5% or even 10% for the last quarter, the yen would have been down and the Nikkei would keep going up anyway.

My point is: don't pay attention to the news and don't even think that it has any sort of influence on the market whatsoever (apart from a 100 pip variation in the hour following the release maybe). Never trade the news. And don't do drugs either.

In normal conditions, the "thing" behind a market's direction is stronger than Mario Draghi being dovish or George Soros farting. A market is like a huge oil tanker: it takes time and effort to make it turn. If anything, a comment by a central banker (or any other important people with an expensive suit, gray hair and a fat belly) that shakes any given asset against the weekly/monthly direction is nothing else than an opportunity for you to re-enter the dragon.

Looking at a daily USDJPY chart, one thing strikes me: it's sooooo bullish that I hope that not even one person on Earth is considering selling a hypothetical high.
The downward resistance from the beginning of the year 2000 is breached big time, and the pair has even broken out above an ascending channel from 2013.

Now the pair might, maybe, need a little rest. A deep breath before it continues climbing to the top. ADX has actually peaked and is pointing down, the current daily candle is mixed, RSI is in overbought levels, and the kumo is faaar below.

Unless Abe announces that they decided to distribute free 10 000 yen bills in the streets of Tokyo, I think that it is time for this pair to take a break. Keep you hands next to your guns and be ready to pull them.

Week End

According to a survey by Bloomberg the world economy is in its worse shape in two years, and even more concerning: deflation is lurking. Central banks in US, Euro Zone and Japan have been pumping money into the financial ecosystem for the last 5 years, buying trillions worth of assets from financial institutions, but still, the risk of deflation is higher than ever.

That's a few hundreds of Bloomberg readers responding to a series of question concerning their opinion as professionals and actors in the economic world. Meanwhile on the financial markets things are doing pretty good. Indexes are up, SPX is at a new historical record, and bonds are down.

Anyone, not necessarily only economists and finance-savvy people, can have their opinion on this. Most people think that something is wrong. It shouldn't be that way. Things have to go back to "normal", and the return to reality will be violent.

Maybe. But if you want to trade, just accept the simple facts that:

• indexes are going up
• dollar is going up
• yen is going down
• precious metals are going down

Just look at the charts and leave aside your "I wish that" and "central bankers are manipulating the market, SPX should be plunging". There is no top until a lower low and a lower high are made.

The situation can be frustrating and piss you off, but you have to admit that it's interesting. Most things that we learned about macro-economy, economic theory, finance etc turn out to be wrong. Back in 2008, after Lehman Brothers collapsed, many economic magazines were warning of the next back swan event. Well, I think that the black swan is here: adding money supply creates deflation, bad economic news push equity indexes up, massive physical gold purchases by China and India mean gold price cut by almost 50%, the US lets Japan/China/Euro Zone and everyone else weaken their currencies while the USD surges...
 

SPX - 13th November 2014

SP500

The context
The SP500 is up 10% this year. Put aside a significant drop under 1,820, the index has done nothing but going up since the beginning of the year. It's a secret for nobody, the SP500 is at historical record levels, and breaking new records almost everyday. If you open a monthly chart, the index has significantly retraced only twice during this incredible climb from the lows of March 2009.

Everybody has their opinion on this incredibly bullish market. Some think it's the result of the Fed's massive Quantitative Easing plans (that have now ended), others think it's because the US economy is doing good and that stock prices are not overvalued. I'll probably write a dedicated post about my personal opinion, but trading-wise it is of no importance. The truth is that SP500 is going up and showing no signs of tiredness. Some people will "warn" you of a reversal, you know what to do.


On the daily chart

• Direction: up, up and up > higher highs+higher lows, above 200 moving average
• ADX: 53 and stable
• Ichimoku: up > cloud is blue and rising, tenkan line above kijun line, chinkou line above price, price is far from kijun line (risk of a small correction)
• RSI: 71, overbought

Today's action
On October 16th the SP500 touched a higher low and bounced on it to new record. It has now reached the top of the ascending channel from March 2012.
You are clearly looking for a buy opportunity here, but current levels are approaching strong resistance and I'd rather not place a trade here.

Nikkei - 12th November 2014

Nikkei 225

The context
Japan has been fighting deflation since the beginning of the 1990s. I personally question this strategy. Japan's economy depends on research, innovation, and exports. After the USA rigged the game with the Plaza Accord to send the Yen higher, even though they had been praising free-floating currencies (only when it's good for them, we know that now), Japan has been trying to keep the yen as low as possible. And it is deflation that allowed Japanese banks to lend at very low interest rates: how can you charge 0.1% if inflation is at 2%?! And will Japan's fantastic investments in R&D and innovation continue if companies have to pay 3 or 4% rates? We'll know the answer in the coming months/years.

Now the Bank of Japan's target is to push consumer price inflation over 2% by 2015 (which it achieved not) while supporting economic growth (which it achieved not). To be fair, the average core consumer inflation in Japan this year is 2.8%, but it was shown that if you trip out the effect of April's consumption tax hike (5 to 8%), inflation is actually 1%... Anyway, the BOJ is targeting these goals and to this end it is running the largest quantitative easing program (central bank purchase of debt and equities, JGB, ETF, REIT etc) in Japan's history, with over $730 billion per year.

The mechanics are simple: pumping cash into financial institutions while pushing bond yields lower encourage finance guys to invest in stock markets. Hence the Nikkei going up big time. The GPIF (largest pension fund in Japan) has announced that it will raise its holding of domestic stocks to 25% of its portfolio from the current 12%. 
So you understand that there is no such thing as free market or invisible hand or demand/supply law, but a strong government will to push the Nikkei higher by all means necessary. I'm not judging it, but what I say is: don't fight against Abe, the BOJ and GPIF. They have more cash than you.

Between 2001 and 2006 the BOJ, through a smaller-scale QE, pushed the Nikkei over 18,000 where it was rejected violently in July 2007, maybe to make a higher low in March of 2008 but then Lehman Bros flushed it to the toilet. The Nikkei has been rising since October of 2012. Then it recently breached an important resistance that rejected it in March 2000 and July 2007. Now, at 17,100, it is above a big declining trendline but approaching the turbulence zone of the 18,000.

How does the Nikkei concern you? Well, the Yen is correlated inversely to the Nikkei, so when Nikkei is up Yen is down (so USDJPY is up). Which is pretty cool because analyzing this index helps your trading on many interesting pairs which are volatile and interesting to trade.

On the daily chart

• Direction: up > higher highs+higher lows, above 200 moving average
• ADX: 45 and rising
• Ichimoku: up > cloud is blue and rising, tenkan line above kijun line, chinkou line above price, price is far from kijun line (risk of a small correction)
• RSI: 66, close to overbought

Today's action
On 3rd November the Nikkei was rejected at 17,440, and then again yesterday. You are clearly looking for a buy opportunity here, but current levels are approaching strong resistance and I'd rather not place a trade here.



One more thing.
Bernard Baruch said:

"Don’t try to buy at the bottom or sell at the top. This can’t be done, except by liars."

RSI or MACD divergence and other crystal ball techniques that can predict that a change in the trend is coming look yummy. You imagine yourself selling at the top where everyone else including George Soros and his grandmother bought the top. But that never happens. That's dangerous because you don't trade what you see but what you expect to see.

A few words before we start...

Is this another BS forex blog ?

No it ain't. I can imagine that you found this blog and you're thinking this is yet another wannabe "finance" blog by some ignorant guy who day-dreams about being a Wall Street big shot. My answer to this is: wrong.

I'm not a Wall Street guy, nor do I think that I am. I'm just a regular dude with some understanding of the financial markets, some trading experience to share, and a taste for writing.
Even though I'm not a quant or a trader, I've been trading currencies for a little bit more than 5 years, and my job got me involved with banks and other financial institutions. And most important, I've started making some profits with trading a couple of years ago, after a lot of time and hopes wasted, and I can help you not waste yours (just because I'm a nice guy!).

So what is this blog ?

What I'd like with this blog is to help people start trading efficiently without wasting their time with all the BS that you find on the internet, and enjoy this both as hobby and a possible new revenue stream. Because that's what it is for me: an additional revenue stream that buys flowers for my wife, a dinner at the restaurant here and there, and maybe a week-end trip when times are good. Plus writing this gives me a practical and useful reason to spent time on the Bloomberg app on my tablet.
To put it shortly: I'm not making a living with my trading activity. My yearly profits for 2013 are about 17% and this year will be better only because the markets have been going in one direction since January, making things a lot more simple.

How is it different from the 1 000 000s blogs that claim they can teach me something ?

Let's be honest, most of the people on internet/Twitter who claim to make thousands of $$ to sell you a trading signal service are liars. I know that for a fact. I've followed a lot of self proclaimed market-savvy people who tweet very smart things, and very very few were ahead of the curve when the wind turns (I'll make a post about the real good people out there on Twitter). Those guys are easily spotted because they are not consistent in what they say, and because they always claim that they "told you so" when something happens on the markets.
And in my quest for the holy grail, I've tested a dozen of forex signals with demo accounts and none of them was profitable. I repeat: none.
Let's not even talk about robots, automatic trading or mirror trading. One word for those: scam (I could also write a post to describe the mechanics of those scams, but later). So run, you fools.

Making it short: if you trade currencies with a 10 000$ account, you can expect to make, at the maximum, around 100$ per month. Sometimes a lot less, sometimes a little more.
This is possible if you know some simple rules and that you stick to it (and this is the most difficult part of this activity). 

Who am I (and what am I to you) ?

I started my trading "career" with no knowledge of technical analysis or charts. I have a College degree in economics, so my first thought was that I should trade based on a macro-economic analysis. I was unexperienced (and maybe a bit stupid too), so I gave up that idea and convinced myself that I'd be better off scalping and booking daily profits on short term time-frames, like they recommended on those blogs I was reading. I wanted to be a "day trader", so I needed to do my homework : pivot points, trendlines, fibonacci, ichimoku and all. That seems straightforward, but still for some reason I was not able to book 100 pips every day like I was planning !

Beginner's luck did let me book some profits here and there, but the reality of market physics always took back my hardly earned pips. After a few months, my P/L was something like 8 dollars, for hundreds of hours spent in front of my charts (even at the office, in bed, while eating...).
I never went in the red because I traded small. Very small. Never more than 2% of my account was at stake. And that's the only thing that I did right at that time.

While wasting my time on this profit see-saw, I was trying hard to understand what I was doing wrong. Finance is complicated, so you need to read a lot, learn new words and concepts, spend your day on Bloomberg/Reuters, follow some trading guru on Twitter, and always question what you're doing. That's why I thought at least. Also, one difficult thing was the language: I'm not an American, so all the lingo was a bit of a trouble for me. Like this article published by the New Yorker says, financial jargon is tricky. And it gets worse if you're from a non Anglo-saxon country where people don't use credit, loans, mortgages, and pension funds at every point of their lives.

Ok, but what's the point of all that ?

It's only with time and a little experience that I realized that simple is always better. Don't ever complicate things that can be simple. So here are some rules that I apply to my trading that have allowed me to book more profits than losses:

• trading on financial markets is just like trading physical goods: buy low, sell high. That sounds stupid to say, but I guarantee you that when your trading is not doing good and you're looking for answers everywhere it is good to remind you that. Put a post-it on your computer screen if necessary.
• you can never guess the market direction of the day. Never. What you can do is check what the direction has been for the last few weeks and months. Always follow long-term trends because they are hard to invert. Day-trade will kill you.
• don't try to chase the big boys. They have lots of cash, algorithms and insider information so you'll always lose if you try to catch a sudden move: don't trade the news, don't trade on the short term, and don't panic-trade if you see the markets move suddenly. 
• don't try to understand why. The Fed announces more QE and USD rises, and the next day the Fed cuts QE and USD rises while you expected it to fall: you're pissed and ask why. I know you do, because I did. Don't trade your expectations and what you'd like markets to do, that will drive you crazy. Trade USD long until proven wrong, i.e. until a lower low is made on a daily chart.
• don't ever spend more than 10 minutes on a chart! Even if you like to have many indicators/oscillators, just check the only important thing: is it rising or falling? That takes a few seconds and then you know if you're looking for a buy or sell opportunity.
• trade a trend only when it is a strong one: use ADX and trade only when it is above 25 and rising. 
• manage your risks like they teach you in the textbooks. Risk management is one of the few things that is taught right, so pick up your subject matter expert and read, but keep it simple: place stops under previous low on a long trade/above previous high on a short trade, and move them using SAR.

That's pretty much it. Then all you have is to determine what is a low price to buy in a rising market or a high price to sell in a falling market. Trendlines and oscillators are meant for that.

But this blog is not a trading signal and I won't be giving buying/selling prices. All I do is giving a straight up market trend analysis. I tell what the market direction is, how strong the trend is, and whether I think the market is tradable or not, day-to-day.

And I hope that this will help you focus on what's important. I hope that it will be useful to all the people out there that think that forex is either a scam or a way to get rich. It is neither, but there is some cheddar to make if you know the rules.