Japanese Yen to Return to Carry Trade?

Looking at the Wednesday session, there are a handful of things it could move the markets before it's all said and done. The first thing, of course, is the ADP Non-Farm Employment Change figures, expected to be 152,004 for the month of November. I generally don't pay too much attention to this number unless it is shocking for the market. As a general rule, it only gives you a bit of a "heads up" as to which direction the real employment numbers are going to be on Friday.

What I'll be paying the most attention to will be the ISM Services PMI numbers coming out the United States at 3 PM GMT, and then peripherally will be watching the speech for any headlines that Jerome Powell will be giving at 6:45 PM. I would put any chances of him moving the markets during this appearance at about 10%, but because I cannot put it at 0%, I will have to at least keep my "ear to the ground."

Japanese Yen

A currency that I have been watching as of late has been the Japanese yen. It has appreciated quite remarkably against multiple currencies around the world, and what's been even more impressive is that it has been reasonably strong against the US dollar. Overnight, it appears that traders have seen enough and that the US dollar has seen a significant bounce. At this point, I believe that the USD/JPY pair is about to rally somewhat significantly, but it will be noisy on the way up.

I suspect at this point in time, the real fight is probably closer to the ¥151.75 level, but it certainly looks like we are trying to turn things around. For what it's worth, I have seen the GBP/JPY take off to the upside, as well as the AUD/JPY and NZD/JPY pair's recover after initial drops. In other words, this is a move that seems to be global against the Japanese yen. Perhaps the "carry trade" is about to make a return.

The yield differential between Japan and the United States is quite prominent, and part of what we have seen during the early hours on Wednesday could very well be the fact that the yields in America did tick slightly higher. Below, you'll see a chart of the US yields on the 10-year note in red, with the Japanese underneath in blue. This is still a very wide differential, and over the longer term should continue to favor the US dollar, although with the jobs number on Friday things could be very noisy over the next couple of days. In order to hang on to this trade, you will probably have to be fairly uncomfortable at times.

Gold

I think gold has further to go over the longer term, and this is something that I've been pretty vocal about. When you look in the chart below, it's pretty obvious that despite the fact that yields are at roughly 4.258% on the 10-year, pictured in blue, gold still has been strong. Typically speaking, the higher interest rate will squash the idea of owning gold because larger firms will need to hold physical gold, which incurs a certain amount of cost. Quite often, they would rather have bonds because they produce a yield and can be held electronically. The fact that gold has ignored this tells me that there is still a desire to own it, and I think we are in the midst of consolidation before our next run, which I believe will be toward the $3000 level.

Despite the fact that the media is ignoring it, there are still plenty of geopolitical concerns when it comes to portfolios, not the least of which is Ukraine. The fact that everything continues to escalate seems to be something that the media is not focusing on, but considering that things are normally "priced into the market" by the time they happen, gold is something worth watching.

Cocoa

Cocoa. Yes, Cocoa. I'm talking about cocoa because it is a market that many of you probably don't trade but might have access to via the CFD markets. The futures markets have been very erratic over the last several months, and it's probably worth knowing that the price of cocoa is up about 2 1/2 times since New Year's Day 2024. Recently, we have seen cocoa shoot straight up in the air again, so it is worth paying close attention to what's going on. It looks like somewhere near the $7000/ton level there is a massive amount of support, and near the $10,000/ton level there is significant resistance. However, it looks like we are going to do everything we can to try to break above it.

It is because of this that I'll be watching for short-term dips that I can buy into. Cocoa is not something that I hang on to long-term, because quite frankly, it's a lot like natural gas in the sense that it is driven by weather. West Africa is a major producer of this commodity, and it has seen fairly erratic weather patterns as of late. I believe this is going to be a market that remains active for a couple of months.

The rest of the week

The rest of the week will certainly focus on employment figures out of the United States, which are expected to be robust. The United States is expected to add 218,000 jobs for the previous month, and I would postulate that anything above 225,000 jobs probably has the US dollar rallying quite significantly. It's also worth noting that the US dollar is at extreme levels against the euro, the New Zealand dollar, the Australian dollar, and many others. Particularly interesting these days are the emerging market currencies, as they look particularly vulnerable. Malaysian ringgit anyone? (I'm looking for a move above the 4.50 MYR level to start going long USD/MYR.)

Trade well,

Chris