Abeconomics: Dollar Yen to 124…?

by George Hatjoullis

Weekly Dollar yen

Looking at the weekly Dollar Yen chart it hard not to conclude that it will reach 124 before this rally ends. There seems to be a well defined continuation pattern, the measured move ending at 124 or thereabouts. To be sure there is resistance at 106 but there is always resistance somewhere! The path may not be a straight line but retracements are bounded below if it is a continuation pattern. The stop levels would need to be within the range 99 to 96. Still risking 6 points to make 22 is not bad risk/reward and you could operate with a 3 point stop from present levels. This could be the most lucrative trade of the next 12-18 months. Oddly enough it is not being widely discussed.

There is widespread scepticism about the Abeconomics programme. It is not hard to find someone who will dismiss it. This is not entirely surprising given how long the Japan deflation has been in place. There is nothing magical about Abeconomics. It is an approach that could have been adopted at any time over the last 20 years. Aspects of the programme have been adopted and appeared ineffective. So what has changed?

As always the past has conditioned thinking and is generating scepticism. The real change is in the commitment to success. Abe has basically said ‘whatever it takes’. The big problem was to get monetary growth with a broken banking system (take note eurozone). Abe told the BoJ to double the money supply in two years. However, reading between the lines one can see this is not a target. The real statement to individuals and markets alike was ‘your size is my size’. For the reader not familiar with trader-talk, this simply means how much monetary growth do you need to persuade you that the deflation is over? This is how much you will get. Moreover, if the banks cannot deliver it the central bank will do so directly. It will print money and hand it over to the government to finance its spending. Of course, Abe has not used this language but this is his meaning and intent. Moreover, there is no going back. He continues until the deflation mentality has been broken. Most important, if he continues it will eventually break. So is there is a logic to Dollar yen at 124? There is, most certainly.

A lot of ‘buts’ can and will be thrown at this view. Most have been answered in the previous Abeconomics blogs. Perhaps the most compelling argument however is the above chart itself. If a chart indicates a well defined move it is remarkable how often the move occurs even though it seems implausible for most of the journey.

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