Wednesday, January 31, 2007

It was a simple misunderstanding

Currency markets were rocked when Hammerin' Hank Paulson hit the tape 5 minutes before the month-end fixing. The headline read


That was all the headline-chasing FX market needed, and USD/JPY cratered as a result, no doubt making an unhappy end of month for many punters.

However, the substance of his remarks were very different from the initial headline. From the Bloomberg story:

Paulson said he judges that the yen reflects the economic``fundamentals'' of the Japanese economy rather than any sort of``intervention'' by Japanese government officials in thecurrency markets. Japan's authorities have refrained fromselling their currency for almost three years, he noted. ``There has been no intervention in the yen since March of2004,'' he said. ``I don't think there's been verbalintervention for almost a year. I don't like verbal intervention.''

He is talking to of course he is going to say he is watching the yen. However, the substance of his remarks is that he knows why USD/JPY is up here, and he doesn't have a problem with it.

The $/yen sell-off, therefore, represents an opportunity.

Macro man therefore buys $20 million USD/JPY for the beta plus carry trade at 120.89 spot basis, which is 120.43 to the new 1 month forward date, 02 March.

Separately, Macro Man was filled at 6.96 in USD/SEK.


wcw said...

I don't think you're right on the rationale here, though of course that alone doesn't make this a bad trade. EUR/USD were bid up at the same time and in almost the same proportion.

However, if all you're looking to capture is the 25-bps difference between the EUR and the JPY rallies today, then I retract my critique.

Anonymous said...

Looks like you have a great buying opportunity on this trade . Paulsen served it up on a silver tray .

I'm with you on USD/JPY

Macro Man said...

wcw, welcome to the site.

I would take issue with your comment, as the yen jumped quite sharply across the board when the first headline hit the tape )just before month-end fixing...great!) EUR/JPY, for example, fell from 157.80 to 156.90 in the span of about 5 minutes on the basis of the comments.

I have spoken to people who are incredibly well-informed about this situation, and the feedback that I get is uniform: the only people who care about the yen are the Europeans, which won't be enough to stop the trend until the ECB stops tightening and they intervene.

Although this trade is marginally offside as I write, experience ha demonstrated that the best time to buy USD/JOY is when it feels like the worst time- i.e. when it looks like the bottom is dropping out.

The subsequent, and infuriating, rally in NZD/USD this evening suggests that yen shorts remain the correct trade.

wcw said...

As I said, even were your rationale incorrect, and as it's a minor point I am happy to accede to your analysis, that doesn't make this the wrong trade.

I agree that only Euroland cares about the Yen, and I agree that the ECB is still tightening. That said, you're not short JPY/EUR, you're short JPY/USD, and the Fed is on hold for the foreseeable future.

Macro Man said...

Yes, fair enough.

The way I see it, EUR/JPY and USD/JPY are more or less the same trade (average 40d return correlation of 0.5 since 1999), except one is ludicrously overvalued and pays you 3.3% carry, and the other is very moderately overvalued and pays you 4.8% carry.

EUR/USD I am fairly agnostic at the moment, but I am both literally and figuratively (via the non-implementation of the beta trade) short AUD and NZD, two high yielding but extended and crowded currencies.