On April 4, newly installed Bank of Japan Governor Haruhiko Kuroda announced a stimulus program similar to Quantitative Easing — only it is three times as large, relative to the underlying size of the economy. The stated goal was to raise Japan’s inflation rate to 2% and weaken the yen to the benefit of Japanese exporters.
Japanese equity, currency and debt markets promptly started running like a scalded macaque. The yen went from under 93 per dollar on the April 4 to over 103 on May 23. During the same five weeks the Nikkei 225 gained more than 25%.
Three weeks later the yen is firmly below 100 again, the Nikkei is bouncing after a nearly 20%, and it’s still impossible to form more than an educated guess as to what will happen next. If every country on earth is debasing its currency, relative valuation becomes next to impossible.
Jeff Kilburg, founder and CEO of KKM Financial and a CNBC contributor, says the Japanese aren’t going to let the yen slide back to its old lows without a fight.
“Japan’s going to come harder; they’re going to come with more stimulus,” Kilburg says in the attached video. “The currency wars are in full effect, and that kind of volatility will trickle into other markets.”
The yen bottomed against the dollar and shot sharply higher the same week the Nikkei crashed and the S&P 500 topped. That’s not at all coincidental. U.S. equity holders have been looking for a good reason to take profits for months. The shock waves from Abenomics slamming into our shores is as good a reason as any.
Kilburg says more tumult looms in the months ahead. The volumes are thin, stocks are still sporting tremendous gains for the year, and no one has any idea when the stimulus ends — not even the central bankers who are ostensibly the masters of their own printing presses.
In times of confusion, charts are the tell for stocks and currency. The S&P 500 reversed perfectly off support near 1,600 last week. That price level is now critical. For bulls it’s a high percentage place to put money to work. For bears, a break of 1,600 will be seen as a trendline break that could mark the end of a seven-month rally.
On the dollar-yen trade, keep an eye on 100. Right now a dollar buys about 99 yen; 100 is resistance. For the bounces in the Nikkei and the S&P 500 to last the yen needs to keep moving the way the BoJ wants. That means taking out 100 again.
For those not inclined to stare at the relationship between yen, Nikkei and S&P 500, it might be best to spend the summer away from the markets entirely.