Anda di halaman 1dari 2



To contact FX CONCEPTS New York: 1 (212) 554-6830; London: +44 20 7213 9600; Singapore: (65) 67352898;

When the German Recession Shows its Face
By John R Taylor, Jr.
Chief Investment Officer
You might ask: What German recession? We would reply there is clearly one just over
the horizon as the real data coming out of the country spells trouble: dropping exports,
dropping imports, and sharply lower manufacturing and industrial production numbers,
plus a weakening trend in retail sales. These coincident indicators are beginning to
appear to match the cooling of the markets led by the year-long decline in rates and the
recent under-performance of German equities. Although the German economy grew at
a 0.8% rate in Q1, almost a 3.4% rate in an annualized format, dragging the Eurozone
growth from negative to positive all by itself, Q2 will show a dramatic reversal. Germany
(30% of Eurozone GDP) will not be the locomotive to keep the other 17 countries (70%)
on the positive growth path. Look for the Eurozone to register GDP growth of 0.0% in
Q2. Very recent forecasts for Germany now range from 0.1% to 0.5%, as there is still a
strong presumption that the services side of the economy will hold up the total.

With the May industrial production index now below that of a year ago, this very
dangerous soft spot leaves the country exposed to global uncertainty. The German
strategy stressing exports, primarily sophisticated manufactures or capital equipment, to
fast growing emerging markets could backfire as they have become tied to the more
volatile part of the world economy. The Germans have ridden the upward move, but now
must suffer the contraction. With expensive labor, even after adjusting for productivity,
and an incredibly high cost of energy the countrys policy of moving away from nuclear
power while the Russians hold the high cards in the natural gas arena, is very risky.
There is no room for error. BMW has announced it will be making energy intensive
equipment in the US state of Washington where the cost of electricity is one-sixth of that
in Germany. Add in a weak hinterland the periphery states in the Eurozone and a
shrinking population and it is hard to see how Germany can power Europe much in the
next few years.

We are not really worrying about Germany, but about the whole euro-financial system,
the shrinking bank asset base, and the value of the euro. What can the ECB do? If
growth fails to perk up in Q2 and the present quarter looks similar, the ECB will be forced
to act even though core financial leaders like Couere and Schaeuble just repeated again
that the ECB moves made in June will be enough. The Europeans hope and emotion
have been more positive than reality. High automobile sales are a sign euro-consumers
have run down their rolling stock and need to replace it, not that things are great. And
the positive PMI, ZEW, and Ifo numbers are a function of the been down so long, the
bottom looks up to me outlook that lightens the mood in difficult times. Our experience
with the statements of European leaders as well as the opinion surveys is that over the
last five years, they have proven to be very wide of the mark, erring always in a positive
direction. With the AQR financial strength results coming in the fall, with the T-LTRO
only applying after September 1, and remembering that Couere and Schaeuble are at
the center of European power, we must concede the ECB will stay pat until at least the
September meeting and more likely into the October one. If the German numbers are
telling us anything, and if Hollandes France is unable to move even its PMI into a
positive position, where can the Eurozone be? Only Spain (11% of euro-GDP) can be
identified with a positive story. The next step has to be some kind of QE, even if it
involves buying bonds of other countries like the US and Japan. The ECB must force-
feed the economy, no matter how un-European it might seem.
To contact FX CONCEPTS New York: 1 (212) 554-6830; London: +44 20 7213 9600; Singapore: (65) 67352898;

CURRENCY Asia Long-Term View

Time to Position for a Weak Yen
By John R. Taylor, Jr.

The Japanese seem determined to do it their
own way. Even though we again don't
understand how expanding the Bank of
Japan's balance sheet at a rate more than
twice as fast as the Fed or the Bank of England
at their most aggressive while leaving all the
growth restricting structures, well known and
analyzed by everyone, untouched can possibly
succeed, Abe seems to be doing it. Our task
here is not to judge the pros, cons and
probabilities of success of Abes unorthodox
strategy over the long run, but to predict how the price of the yen will develop in the next
three to six months.

Before we look at the cycles at this very important point in time, we would like to think
about the positioning of the major players in the Japanese financial markets. The
masters of the hedge fund world played the Nikkei aggressively, while selling the yen in
the run up from the 4th quarter of 2012 into the end of last year, but now they have lost
their yen for the Nikkei but have become more certain of a bad end to Abes strategy,
including a weak yen and a falling bond market. JGBs are turning from a yield of 0.56%.
As the trend establishes itself it will draw hedge funds like flies bringing a sale of yen,
longer swaps and debt futures. The thought is there but the positions are still small.
Simple short yen positions will come first and the leveraged community will climb
on once the 102.40 resistance is cleared by the end of July at the latest. The
government is pushing its agents and anyone listening to move away from domestic
markets and into offshore ones, driving the yen down. A sluggish Nikkei and weak bonds
should accelerate this process and the government will not stop pushing this until the
JGB rates move at least to 1.00%, still in the comfortable range of the past few years.
Exporters need a weak yen to improve margins, especially as they are losing market
share and need to raise wages as good corporate citizens. The US authorities are
neutral and the only ones against this weaker yen are Korea and China. We all know
where they rank, and they arent even in the G-7.

The major cycles tell us the USD/JPY could turn higher any day, but the medium
term ones warn that later next week of even the week of July 21 would be more
appropriate. As the currency pair is almost frozen, it will be a slow reversal and we will
probably get very excited on some day with very little movement. The 101.20 to 101.45
area is full of strong support. A break below changes everything and would result in a
very quick move to the 100.50 level. A close over 102.40 would be the trigger to an
upmove into November or more likely December. Our target is the 104.25 area in mid-
September and the 107.50 level at a minimum near the end of the year. Right now we
are throwing caution to the winds and buying some USD/JPY with the Bank of Japan
buying some too or so the recent rumors say.