TLT - The Yen Rally Is Likely Over

Summary

• Last week, the Bank of Japan decided to raise the upper band of the 10-year JGB yield, which will allow it to trade up by 25 basis points (from 25 to 50 bps). That caused a violent surge in the yen as well as an upswing on both U.S. and European long-term bond yields.
• If the 10-year U.S. yield rises above 4% and retests the highs from October, the yen likely has a lot of downside to go, given how far it has moved from its October lows.
• Since the 2022 sell-off started, the first major low in the VIX is 18.45. We are near the lows of that range, even after a 300-point sell-off in the S&P 500 since mid-December.

The low in the yen at 151.95 (per dollar) in October closely coincides with the top in long-term U.S. interest rates (the yen is on an inverted scale here, so when the chart is going up, the yen is weaker, as it means more yen per dollar). Then, last week, the Bank of Japan decided to raise the upper band of the 10-year JGB yield, which will allow it to trade up by 25 basis points (from 25 to 50 bps). That caused a violent surge in the yen as well as an upswing in both U.S. and European long-term bond yields.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Before last week, the yen was primarily driven by Fed and ECB monetary policy, but now the BOJ has stepped in. Still, it is not expected that there will be any more moves by the BOJ before its Governor Haruhiko Kuroda steps down in 2023 and his successor gets to take a fresh look at how to deal with the Japanese situation, which has been in a deflationary malaise for the better part of the past 30 years.

U.S. long-term rates began to move up again one week after European rates, which were significantly more responsive to the ECB monetary policy meeting two weeks ago. If the 10-year U.S. yield rises above 4% and retests the highs from October, the yen likely has a lot of downside to go, given how far it has moved from its October lows. I don’t think it will hit 152 again, but stranger things have happened.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

A lot of investors have assumed that a recession is a foregone conclusion in 2023, which is why the 10-year is not above 4%. If there is no recession in 2023, and I think this is a possibility, then I think we will see the 10-year above 4% again. The big question is: Have we made the high on the 10-year for this cycle yet? The answer will have serious implications for currencies like the yen and euro, and stocks in general.

The VIX Shows Complacency

The VIX, otherwise known as the fear gauge, shows no fear. Since the 2022 sell-off started, the first major low in the VIX is 18.45 (we got as low as 18.95 in early December). We have been lower in early January before the sell-off started in earnest, but the range for this sell-off after it got going has been 18.45-38.94. We are near the lows of that range, even after a 300-point sell-off in the S&P 500 since mid-December.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Mind you, the total rally off the October lows was about 600 S&P points, so we lost half the gains and the VIX didn’t really budge. I am not sure why investors don’t show fear, but it is pretty clear (from looking at options pricing) that such is the case.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

There is a similar index for the Nasdaq 100 called VXN (above), and for the Russell 2000 called RVX (not shown). They both show a similar picture - a lack of fear.

The VXN is even more peculiar, as the decline in the Nasdaq 100 has been much bigger than the S&P 500 decline, and there had been monstrous rotation out of tech stocks into industrials and financials leading to the massive outperformance of the Dow Jones Industrial Average over all the major indexes.

All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.

Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.

Disclaimer: Please click here for important disclosures located in the "About" section of the Navellier & Associates profile that accompany this article.

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