What does the high Yen mean for Treasury bonds?

The Yen is at a 15-year high. This is a sign of severe dislocation in the global markets. Other notable milestones include Treasuries at record low yields and housing sales at 1995 levels.


You wouldn't know pressures in the global economy were this extreme from looking at the trading ranges the S&P 500, MSCI emerging market index, gold, and oil have been trading in.

This mismatch makes me nervous. How much higher can the Yen go? If the Yen rally tires, will it bump those other indexes out of their trading ranges? The chart is not very helpful. Although the dollar is very low versus the yen, the right and left ends of the chart look eerily similar.

The Japanese economy is suffering from the high yen. Toyota recently pleaded with the central bank to engage in quantitative easing to push down the yen, as its cars manufactured in Japan have become uncompetitive as exports due to the high costs. In my opinion, the yen's strength has come from a flight to safety and global deflation fears. The high yen has now put pressure on the Japanese government to sell yen and buy dollars.

The speculators are front-running what they see as a sure thing in U.S. Treasuries. So far, though, the Bank of Japan has refused to comply. Even so, due to its strength against commodities, the DXY dollar index has bottomed and crossed above the 50-day moving average, according to economist Dave Rosenberg.

So, what can be expected if the Bank of Japan obliges its export sector? The most obvious thing would be a big bounce in the U.S. dollar. This would consequently crush commodities and U.S. equities. The recent charge in Treasuries would most likely be over, although that would depend on which maturities the Bank of Japan bought.

Now for the touchy-feely part (I am a strong believer in trading on gut instinct, provided it's trained correctly.) How do I feel about trading this?

My trigger finger is feeling itchy. I am tempted to try to front run a change in market behavior and sell Treasuries. However, I believe it is more prudent and disciplined to stick with my strategy of waiting for a change in market behavior and only then exiting. The change I am looking for would be Treasury yields rising on bad economic news (of falling on good news).

Until the Bank of Japan (or the Fed) prints, market participants will probably be paying attention to this possibility more than anything else.

Disclosure: long 30-yr Treasury bond, short SPY, long EDZ, long gold metal, long gold stocks and options