First let me start by suggesting a grand macro problem: If the Yen comes apart it should get more expensive to Japan’s enormous budget deficit, especially considering its current account has swung from a giant surplus to a slight deficit. Beyond the straight forward logic this reasoning is implied by the positive correlation between JY and Japanese Government Bonds.
The hard part here is that there is an election coming up in a few weeks so even though I have a buy on the Yen, I’ll have to use a tighter stop than usual. The Yen has bullish anchors and is very cheap:
The JGB market is very rich but its anchors are also rallying so this is supposed to be a horse race between rallying markets:
The obvious problem is that no one wants to touch the Yen going into the election and that fear has driven investors to JGB safety. This is the chart of the relative value between JY and JGB’s. The “rich” marker is telling us when the Yen is rich:
These are extremely attractive levels given that positive correlation. The stop is tight and I have no intention of being in this trade at election time.
