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  1. Home
  2. / Investing
  3. / Energy

Why Oil Is Rising But the Yen Should Fall

Shorting crude and buying yen both look like 'crowded trades.'
By MIKE NORMAN Aug 18, 2016 | 02:00 PM EDT
Stocks quotes in this article: YCS

The "zombies" who are foolishly buying the Japanese yen these days are the same ones who were foolishly selling it at the bottom late last year -- not to mention incorrectly dumping oil last week.

Now, I wrote last Wednesday about how people who were selling crude were making a big mistake. Oil was dropping all the way down to $41 a barrel at the time after the U.S. Energy Information Administration's weekly supply report showed rising inventories. But today, oil is back to roughly $48 a barrel.

I went through the reasons last week why I foresaw such a rebound. For instance, I noted that while the 1-million-barrel U.S. inventory build that the EIA reported was disappointing (especially when the market was expecting a drawdown), it wasn't a huge increase. I pointed out that we'd already witnessed a 22-million-barrel drawdown in inventories following their April 29 peak.

I also noted that U.S. gasoline supplies saw a big drawdown last week for the second time in a row. And then there's the issue of energy demand, which no one seems to be talking about. Net oil imports are 30% higher this year vs. last year -- a clear sign of stronger demand.

There are other factors, too, like output not keeping up with demand, rising fiscal stimulus here and abroad and the Saudis talking about wanting oil prices back up over $50. Basically, what I said was that everyone was pointing to the same thing -- supply -- and selling reflexively. That's the definition of a "crowded trade," and sure enough, here we are with oil back at around $48 a barrel.

The yen's recent strength looks like a crowded trade to me, too. In fact, it seems like a mirror image of the Japanese currency's weakness against the dollar late last year.

You might remember that I was pounding the table in December to recommend buying yen even as others sold the Japanese currency amid ridiculous, misguided worries about a non-existent "debt crisis." I explained that Japan couldn't have a debt crisis because it's a currency issuer and all of its debts are in yen. Therefore, the Bank of Japan's negative interest rates and asset purchases merely looked deflationary to me, which was bullish for the yen.

I also noted that the country was turning its nuclear reactors back on some five years after shutting them down following the 2011 Fukushima earthquake and nuclear accident. As a result, I expected Japan's rare, oil-import-induced trade deficit to flip over into a surplus. It did -- and the yen rallied big-time.

But now, different fundamentals are emerging. For one thing, the Japanese government is engaging in fiscal stimulus for the first time in years, with something like $280 billion in addition public spending planned for this year. Second, oil prices are rising again, which will cut into Japan's current-account surplus. In fact, we just got word overnight that Japanese exports suffered their biggest drop during July since the financial crash. That's not bullish for the yen.

About the only thing that I see holding the yen up now are the deflationary policies that the Bank of Japan seems to be implementing non-stop. But that won't be enough to support the currency when package after package of fiscal stimulus arrives. So trust me -- the yen is going to head back downward. But as I noted above, it seems like the same zombies who were selling the yen last December are buying the currency today.

It's amazing when I watch people make trades like that. What they are looking at? I think it's all just a guessing game for a lot of folks. They simply do what the crowd does, or perhaps they've gotten in the game just to feel the action rather than earn profits.

But personally, I'm in it to make money -- and I assume you are, too. So given the yen's eroding fundamentals, I think you can buy the ProShares UltraShort Yen ETF (YCS) at its current price of around $59 a share. This ETF is a 2x inverse play on the yen vs. the U.S. dollar, and I think you can do quite well holding it.

I don't currently own YCS, but I'm long USD/JPY in the forex market. After all, I'm confident that the yen is going to drop as fiscal stimulus takes hold in Japan. In fact, the only impediment that I see to a sharp fall would be more Bank of Japan monetary stimulus -- which is of course isn't really stimulus, but just deflationary policy. Frankly, that's the only thing I think is holding up the yen right now.

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At the time of publication, Norman was long USD/JPY, although positions may change at any time.

TAGS: Currencies | Markets | Financial Services | Investing | Energy | Economic Data | Oil Equipment/Services

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