The “Panic Premium”: Beyond This Level In The USDJPY, Japan Collapses

The “Panic Premium”: Beyond This Level In The USDJPY, Japan Collapses

Submitted by Tyler Durden on 12/02/2014 15:25 -0500

If all it took to push stocks to ever recorder(est) highs, granted on no volume, but recorder(est) highs nonetheless, was for correlation algos to pick a carry FX pair trade du jour which to push the Nikkei, or the Dax, or – most frequently – the S&P higher, then all equity indices would already been in scientific digit territory. And since they aren’t, it is only logical that prosperity through currency debasement can only “work” for so long.

But how long?

Well, when it comes to the primary carry pair du jour, the Dollar-Yen, the answer may be just a few hundred pips more, before it all comes unglued for Japan’s Prime Minister whose first stint in the role ended in a prophetic bout of epic diarrhea, Shinzo Abe.

According to a SocGen report authored by Alain Bokobza, released earlier today, all hell will break loose when the USDJPY, currently trading at 7 year highs north of 119, leaves 123 in the rearview mirror.To wit:

To leverage Abenomics in an investment strategy has clearly become more difficult as the balance between the fiscal and monetary policies remains unclear, making it a source of instability and pushing the yen into a very high volatility regime that prevents foreign investors from hedging at a reasonable price.

As long as the domestic bond market remains protected by central bank buying, and up to dollar/yen levels of around 123 (SGe end 2015), the equity market should continue to react positively (corresponding level for the Topix: 1,575).

Beyond that threshold, there is a risk that current correlations could break and change to those prior to 2006. A collapse of the yen (not SG’s central scenario) could then create a “panic premium” on Japanese assets, in which case the yen would fall much further still, putting JGBs at risk and sending the equity market sharply down.

And yet paradoxically, none other than that “other” SocGen strategist, Albert Edwards, correctly predicted back in September not only USDJPY 120 as the next key level for the Yen (months before Paul Krugman became Japan’s de facto central bank head, a move the soon to be annihilated nation will forever regret), but a few weeks ago forecast 145 in the Dollar Yen as soon as Q1 2015.

In other words, the French bank not only just planted the bogey beyond which Abenomics loses control (because central planning really is, is a self-fulfilling prophecy), but is explicitly predicting precisely that.

Then again, a complete collapse in the world’s third largest economy, in lieu of a global war, may be just what the Keynesian doctor ordered – just imagine the excuses the Fed would have to resume printing then: “we don’t want to do push CTRL-P, but Japan’s economic depression simply left us no choice…”

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