The yen breaks out

For the first time in what seems like aeons, there's been some intersting price action in the markets with which Macro Man has been most engaged.   The dollar's been on a rip the last few days, though somewhat surprisingly (given the plethora of yet more Greek worries), the best-looking chart is USD/JPY.

Yesterday the pair broke through the highs of last December and this March, signalling the end of the recent pennant-type formation and arguing (or is that auguring?) for a sharp move higher.  Somewhat to your author's chagrin, he had been running a tiny short against a few of the other positions in his book; however, the market has spoken, and he has listened, stopping out on Tuesday.

The explosion higher was a bit bemusing from his perch, insofar as there was little confirmation from fixed income or equities (with which USD/JPY has traditionally been correlated), and the magnitude of the daily change was substantially higher than  that in the euro, apparently eliminating the Greek nonsense as a raison d'etre for the rally.   Occam's Razor would suggest that there were a load of buy stops/signals from barriers and models that triggered with the break of the previous high, which is as good an explanation as any.

While it is tempting to pull the old "stop and reverse" - and Macro Man may end up doing so eventually- he finds it difficult to envisage building a large structural position at this juncture.  As noted previously, at current levels USD/JPY is quite stretched from its PPP equilibrium, and while there's no guarantee that it will snap back imminently, it's rarely been a wise investment decision to buy USD/JPY 15% over fair value.   To be sure, Japan's current account dynamics are different now from the past several decades; nevertheless, if and when we get a bit of a financial shock, Macro Man would expect USD/JPY to repeat its usual trick of going up the escalator and down the lift shaft.

Of course, it would be easier to take comfort in long USD/JPY if US rates were rising, and to be fair they have a bit at the long end.   But short ends are still stuck hitting the Snooz button repeatedly, and your author would prefer to see them wake up before getting fully engaged with the narrative.

Therefore, alas, he is in watch and wait mode, and and length that he eventually accedes to is likely to be tactical in nature.  For now, he's happy to concede the tub-thumping stage to the macro tourists who've never been involved during a USD/JPY "lift shaft" moment.  For better or for worse, however, they seem to have the firepower to withstand large and lengthy drawdowns of the type required to do "proper" macro, unlike many modern global macro establishments where the mantra is loss avoidance uber alles.  It's a funny old world sometimes...