Wednesday, November 28, 2012

Knights That Go Yen

Every bar in every town in every wild remote unforgiving desolate landscape has one. No matter how ghostly the neighbourhood, how empty the streets, how dusty the tables and chairs in the room with the cracked panelling, peeling paint, and greased windows, there at the back of every bar will be a sole figure hunched over a laboured glass, stretching time until, like a curious statue, they catch the eye of the poor soul who has just walked in with a medusa stare. The victim's small vestigial ganglion of primative neurones that is their last chance of escape, cannot muster enough adrenalin to persuade the rest of their stunned nervous system to register blind panic and RUN. It is too late, for soon the creature with the glass will open its mouth and slur in a drawl:

"Did ah tell you about the days I used to run a Hedge Fund?"

There was a show in the UK called the Fast Show and one of the characters was "Archie" he was the UK's version of the creature described above. And we sorely wish he had been the early 1990s Macro Hedge fund manager...

"Hardest game in the world, yer hedge fund managing. But there was yer glory days too. I can remember when DollarYen used to move. An' I don't mean yer poxy little wobbles of today. No. I mean REALLY move. We was all at it in them days, DollarYen that is. 88 to 140 no problem, would 'appen in an afternoon. We made boat loads. RKO's was me favourite. Only just come out then an' no one knew how to price 'em proper and we just took the piss. But it was tough. Lost it all the next week on some correlation trade that didn't correlate longer than it took me to put the trade on. Hardest game in the world that hedge fund game... Do you want to get me a drink?"

Yes... USD/JPY was the weapon of choice for many an old Hedge fund warrior.

But TMM are detecting a deep infrasound. A low rumble mostly detectable through the feet rather than the ears. And its intensity is growing as USD/JPY climbs higher, accompanied by ghostly clanks of armour and distant warrior cries as the call to arms rejoins across the world, summoning forth the once brave and mighty from their slumbering hollows, bars and Bide-Awee rest homes for Hedge fund managers, to once again rise and fight the old foe... THE YEN.

TMM have been lucky enough to have made decent cash on the move higher since the end of September, but in true dedication to one of their main mottos - "USDJPY will be not be easy" - have taken off most of their exposure, only really having a token position to "intellectually be in it". The recent commentary from PM-to-be Abe that FX intervention won't work, and the seeming clarification that a change in the BoJ Law is not in the LDP manifesto have obviously taken some of the shine off the trade. But TMM think it's a bit more subtle than that as he also continued to pile the pressure on the BoJ to meet a 2% inflation target while arguing for a fiscal response in concert with monetary policy.

Now, orthodoxy would suggest that loose fiscal policy coupled with loose monetary policy in the context of a very poor Balance of Payments position (see chart below) is bad for a currency as expected returns on domestic assets are not enough (as monetary policy prevents them from rising) to bring in capital flows. Similarly, government policies aimed at encouraging domestic investors to send funds abroad for M&A/FDI are keeping the needle pointing away. You don't need FX intervention to weaken a currency if the fundamentals look like this - it will weaken anyway.

Up until recently, TMM had been sceptical of the "short Yen" trade that has continually confounded punters, partially a result of the fact that US rates are so low. So it is clearly worth questioning why this time is likely to be any different? And TMM reckon that the above alignment of policies mean that domestic investors, hitherto the primary driver of the rates/FX relationship, have less incentive to own Yen as the rates relationship is really a "real rate" relationship - and pushing for a 2% inflation target de jure means a rise in expected inflation and commensurate fall in Japanese real rates. Shirakawa & Co. may not believe that that is possible, but the evidence in the US & UK suggests that aggressive easing has indeed kept inflation expectations high. The other consistent buyer of the Yen - exporters, who have consistently hedged receipts have discovered those receipts evaporating in the face of Korean competition and the need to import energy appearing to have become more structural. TMM must admit to being very surprised that the Nuclear plants have not been quietly switched back on.

It almost seems to TMM as Keidanren have finally spurred The Establishment to accept that protecting The Post Office (and pensions) is no longer as important as the potential collapse of Japan Inc. And if that is so, it would arguably be the biggest change to macroeconomic policymaking in Japan for a decade. Not to be ignored.

However...It is the end of November. And the election is in just over two weeks. The move has been dramatic, and *everybody* TMM speak to loves the trade. Which makes TMM nervous, as profit taking into yearend takes hold, the fact that many structures have been put on such as RKOs which have caused people's exposure to evaporate and then buy spot at poor levels. And it's not as if the policy is going to be implemented in two weeks time. TMM therefore reckon that the risk of a Yen washout in the near term probably outweighs the opportunity cost of "missing the move" and have trimmed most of their position, with a view to putting it back on 30th December in anticipation of the traditional piling on of New Year 2013 trades.


How it may ultimately end... the script:

George : You fight with the strength of many men, sir Yen.
(The Yen does not respond)
George : I am George, King of the Hedge Funds.
(no response)
George : I seek the finest and the bravest in the land to join me at my family office in New York.
(no response)
George : You have proved yourself worthy. Will you join me?
(no response)
George : You make me sad. So be it! Come, Stanley.
(As George and Stanley start to ride past the Yen, he suddenly speaks)
George : (taken aback) What?
George: I have no quarrel with your good support, but I must cross this level.
George : I command you, as King of the Hedge Funds, to stand aside.
George : So be it!(draws sword)
(A short battle ensues, where George, relatively unencumbered by regulations and committee mentality, easily dodges the slow and heavy responses of the Yen. Finally, George dodges exporter selling, steps aside, and cuts the Yen’s left arm off with his RKO’s. Profit spurts from the Yen's open wound.)
George : Now stand aside, worthy adversary.
Yen : 'Tis but a scratch.
George : A SCRATCH? Your old BoJ governor is off!
Yen : No it isn't!
George : Well what's that then? (pointing to Shirakawa lying on the ground)
Yen : I've had worse.
George : You LIAR!
Yen : Come on, you low VaR lightweight!
(There follows an even shorter foray, George easily cuts through the Yen's upper support, causing it and the Yen's current account to drop to the ground. Profit spatters freely from the stump.)
George : Victory is mine! (kneeling, praying) We thank thee Lord, that in thy mercy-- He is kicked onto his side by the Yen.
Yen : Come on, then! (kicks George again)
George : (on the ground) What?!?
Yen : (kicking him again) Have at you!
George : (getting up) You are indeed brave, sir Yen, but the fight is mine!
Yen : Ohhh, had enough, eh?
George : Look, you stupid bastard, you've got no exports left!
Yen : Yes I have
George : LOOK!!!
Yen : Just a flesh wound! (kicking George again)
George : Look, STOP that!
Yen : Chicken!!! Chicken!!!!!!!
George : Look, I'll have your JGBs!
(The Yen continues his kicking)
George : RIGHT!(He chops off the Japanese Post Office with his sword)
Yen : (hopping) Right! I'll do you for that!
George : You'll WHAT?
Yen : Come 'ere!
George:(tiring of this) What're you going to do, tax me to death?
George : You're a looney....
Yen : No I'm a Yen and The Yen ALWAYS TRIUMPHS! Have at you!! (hopping around, trying to kick George with his one remaining leg)
(George shrugs his shoulders and, with a mighty swing, removes the Yen's last limb. The Yen falls to the ground. He looks about, realizing he can't move.)
Yen : Okay, we'll call it a draw.
George : Come, Stanley!(they "ride" away)


abee crombie said...

agreed on the Yen sentiment seems to be one way but I wouldnt say the move has been so exagerated yet. A break above 84 maybe gets some CTA's involved..we would also probably need to see UST go above 1.8

abee crombie said...

Anonymous said...

I don't play in FX waters but I am curious. If the effective move is indeed the size implied by the fundamentals (as per your chart), are a couple figures the other way really that big of a deal? (compared to some of the Euro Kevlar moves of this summer for instance).

Or is vol too expensive already to play this through options?

I mean, entry points do matter dont get me wrong but unless I have understood this wrong, people appear to position for a much larger move.

Happy to be educated on this, as there are implications for the playground I am involved in.


Leftback said...

Ah, the Black Knight returns... but will he die this time or will he draw the Mightye Widdowmakker and reap another grim harvest?

Some people (Kyle Bass) think we will get a really monster move in USDJPY b/c Japan has passed the point of no return. Large debt loads (Greece) = debt crisis OR currency devaluation. Gargantuan debt loads = debt crisis AND currency collapse? Watch this space...

All neurones firing today, cpmppi. Good stuff there. Probably a combination of the superior cervical ganglion and the adrenal medulla to drive cardiac acceleration and flight or fight response - a synergy between neural and endocrine pathways.

Anonymous said...

C Says'
More to the point this is shaping up to give soem hedges a right good end of month squeeze round the back of the shed.

Leftback said...

This week's trading has certainly been a largely pointless exercise, C. A lot like Liverpool whenever Stewart Downing plays...

LB is reasonably happy when hedges DON'T WORK, C, b/c that means most of the portfolio is UP. That's sort of the point of hedging, innit?

Still waiting for catalysts and for the new FRBNY OMO schedule to be posted so we can ALL see when the PDs will be gaming the Treasury market.

Anonymous said...

C Says'
Can't believe I wrote that "hedges". Just tired.Thought I was in for a boring end of year and instead just had the busiest couple of weeks imaginable and I'm too old for it! Nonetheless,summoning his not inconsiderable reserves I notice something spooky.Poster child for growth can never happen Uk equity is 80% down from monetary easing high of 2010 and at this exact time of month it last bottomed just below here in 2008. In other words bearing in mind how we got there in 2008 the present outlook presumes that going forward will be has bad in economic terms as the global financial crash was.Given this is a resources stock therefore it assumes we are basically building very little and consuming same.Yet 4 years on there are distinct signs that we would like to build more not less because we already have failed to build sufficient to meet the pile up of 4 years pent up demand for housing in the US and UK and presumably other places.I'm not suggesting anything dramatic for growth,but surely this outlook appears overly pessimistic? I think the short action in some of this stuff could get royally stuffed by any reasonable news on the curent wall of worry.

Anonymous said...

Well I can't help it.I'm going to have to put that to the test.

JD said...

They have been trying and failing to manufacture inflation for decades. *If* they are actually serious this time then there will be plenty of opportunities to get on board.
I actually suspect that this will prove a false dawn and we will see a 6 handle on USDJPY before we see it break 100.
Going to be very interesting to watch the game unfold.

Anonymous said...

C Says
I tend to be in your camp. For the long haul it doesn't matter that much where you jump on at this point unless expect to pre load you weight based upon some exquisite form of timing which completely escapes me.
One matter though based purely upon greed. I favour the GBP/JPY to the USD/JPY.

Pre weekend wrap.Been a lovely couple of weeks ,but I think I will be more than ready for xmas by the time it comes.

Anonymous said...

There is one thing that even Japan electing LDP cannot achieve: persuade US to allow Yen to depreciate.

Yen depreciation means auto imports to the US. Then Detroit will be hurted. When Dem is in power, I do not think that the US will sit still to see Yen falling like stone.