Cloudy

Cloudy
The sky is gray and white and cloudy,
Sometimes dollar-yen is selling off on me
And the brokers, they start to yell
They think yen strength's really swell
And that shorts are goin' to hell
But here's Mrs. Watanabe, now I'm felling pretty well...

- Simon and Garfunkel, "Cloudy" (alternative universe version)

Ichimoku-mania has continued unabated this morning after USD/JPY broke the key cloud support at 120.68 in Tokyo trading. As forecast yesterday, the sell side brokerage community is all in a stir, and for the first time all summer Macro Man now sees more clouds in his Bloomberg message box than he does in the sky.

What does it mean? Is this the end of yen carry, a development which could kick another leg of support out from under the global risk trade? Probably not. Noted carry currencies such as the AUD and NZD, favourites with Japanese retail, aren't exactly rolling over today. And lest we forget, the last break of the cloud support (highlighted below with the arrow) was a superb buying opportunity for USD/JPY.

Elsewhere, a milestone piece of data was released today, but naturally no one cares. The Eurozone current account for May posted a monthly deficit of €14.6 billion, well wider than the expected deficit of €4.2 billion. This deficit was the widest monthly reading on record. Of course, no one cares, because the US deficit is so much bigger in absolute magnitude and, don'tcha know, the dollar is going down forever. Yet the EMU figure, despite the inherent noisiness of the data, is emblematic of something that Macro Man believes very strongly: that an artificially strong exchange rate (the usual outcome for a reserve currency) will ultimately beget uncomfortably large external deficits. It may be years before such a development comes to pass (outside of France, naturally), but come to pass it will.

One somewhat frightening chart is making the rounds this morning that appears to exemplify the dangers of subprime to even "safe" investments. The chart below shows the price of a Luxembourg-based USD money-market fund that is designed to deliver one month LIBOR plus 0.50% per annum. Now as we all know, you cannot get something for nothing, so one way to pick up that yield premium is to take credit risk. The problem, of course, is if your "AAA rated" security is really a piece of subprime junk wearing Groucho glasses. If the price data furnished by Bloomberg is accurate, it suggests that there must be a few unhappy investors out there whose safe cash-plus fund has turned into a 14% monthly loss.

And if that can happen to a money market fund, one wonders what the portfolios of leveraged credit longs must look like. Macro Man is kicking himself for never putting on the long equity/short credit trade, as neither has seen the correction that he'd been waiting for.

Finally, Macro Man was talking with one of his counterparties this morning, who wondered allowed how deleterious the impact of US ARM resets and generalized housing weakness will be. Macro Man's answer was "not very", as the amount of extra mortgage payments from resets is trivial from a macroeconomic perspective, while household net wealth has remained pretty resilient despite the weakness in housing. Were the equity market to follow the housing market lower in the context of rising unemployment, then Macro Man would feel more comfortable in beginning to contemplate rate cuts and a possible recession. That having been said, it always makes sense to hedge when the market lets you, so Macro Man might slap on another low/zero cost option overlay should equities have another nice day.