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...
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Anonymous
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May 27, 2015 at 8:08 PM ×

Is everyone on vacation?

Well, this looks like a rotation, when EUR, GBP, CAD, AUD dropped like rocks in the past few months, JPY did not really change that much. Now USDJPY finally gets its turn. Other major currencies seemed to be unable to get to new lows. So I wonder if JPY's movement indicates the beginning of the end of dollar bull run.

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Mr. T
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May 27, 2015 at 10:11 PM ×

I'm sortof here but can't really look at anything but these crazy crazy moves in the various Chinese markets. Cash bleeding appliance retailer at 400x 2017 earnings on 30Bil USD cap. Random flavor-of-the-month technology companies limit-up day after day. Aircraft part makers for Boeing limit-up on sabre rattling. Coal companies limit up day after day - COAL COMPANIES! Have you seen the "multiples" the coal companies in the rest of the world are getting? 000552 is up about 80% in the last year to a 2.5bil USD cap on negative operating cashflow. Or perhaps 000937, another money losing coal company with a $7BilUSD EV, $5bil cap, with 1/3 the sales of BTU and the same EV. Then there are the margin houses, where the gains are more muted - 002736 is only up 500% from December - and really who knows whats going on in their books. Or the venerable 000001 with $371bilUSD in assets - a big balance sheet - up 50% in the last month or so.

Throughout my career I have consistently underestimated the strength and longevity of the Chinese growth story and the ability of the government to keep all the plates spinning, but I dare say getting out of this equity mess unscathed will be their best trick yet.

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Leftback
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May 27, 2015 at 10:50 PM ×

Ah yes, Chinese coal companies trading like social media, compare with the prices of BTU and ANR in the US.... an industry on its knees at the moment. Mind you, in the end for the right price I'd sooner own the coal companies than social media.....

All clearly complete bllx as Polemic would say, like today's Greek rumor-driven JBTFD squeeze. Back to my hammock.....

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Anonymous
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May 27, 2015 at 11:24 PM ×

There's got to be one mother of a squeeze coming into the holidays so the CB's and politicians can lie on their own hammocks for July & Aug..

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Anonymous
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May 28, 2015 at 8:36 AM ×

What PPP equilibrium is this based on please ?

is there a way to see it on bloomberg ?


" 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. "

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washedup
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May 28, 2015 at 1:32 PM ×

anon 8:36 - with all due respect for MM's analysis, those equilibrium models are shot in a QE world - do you plug in the supposedly normal long run rate after pretending that CB's will QE, or the current market rate? Do you include the BoJ balance sheet expansion as % of GDP as a variable, or focus solely on PPP?
Hey Left, that hammock now has a permanent sag - trading much?

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Macro Man
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May 28, 2015 at 1:45 PM ×

Anon, see the chart in this post

@ washedup, I don't necessarily think QE invalidates the principles of PPP at all, merely explains reasons for the (temporary) divergence.

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Anonymous
admin
May 28, 2015 at 9:37 PM ×

HFT: Decreases liquidity & Increases spreads.
Proof:
https://twitter.com/nanexllc/status/604007597642027009

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Polemic
admin
May 28, 2015 at 10:13 PM ×

Its all just really really dull.

I need a large injection of conviction as I currently feel as though I have been shot up with Market Methedone. I really cant get excited about anything .. yaaaaaaawn.

Pol

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Leftback
admin
May 29, 2015 at 3:54 AM ×

Not so dull in Shanghai overnight. Double digit moves always get the attention....

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Leftback
admin
May 29, 2015 at 9:59 PM ×

Today's US macro was worse than even I expected. The US is going to pick up a bit going into the second half, but the real question is by how much, and how long is that going to keep the Fed on hold? The stronger USD is clearly biting off a chunk of US growth potential, and this is all starting to look a lot like the saga of the BoE's much-heralded Hike That Never Was.

Reserving judgment for now on whether we are flatlining or in a mild recession... does 2/3 negative quarters count? The way it looks now Q1 was -1%, Q2 was <1% and Q3 may again be <0. This is not the stuff of bond bears, obviously....

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Anonymous
admin
May 30, 2015 at 1:05 AM ×

Is Friday a big day? IMF, NFP & OPEC.

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Anonymous
admin
May 30, 2015 at 9:50 AM ×

Robert Shiller: Unlike 1929 This Time Everything - Stocks, Bonds And Housing - Is Overvalued

http://www.zerohedge.com/news/2015-05-29/robert-shiller-unlike-1929-time-everything-stocks-bonds-and-housing-overvalued

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Anonymous
admin
May 30, 2015 at 9:57 AM ×

Check out this chart of chinese equities:
http://imgur.com/BelzHvK

lol

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Polemic
admin
May 30, 2015 at 10:30 AM ×

Anon 9.57. Scaling tricks are sooooo passé

And I would just love to see the success rates of all these "'now' laid over a rough fit of something in the past". Nearly all end up in the bin and those that don't are more chance than anything else.

Pol

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hipper
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May 30, 2015 at 2:18 PM ×

More exhibits piling up in the anti-Grexit scenario cart. IMF deferred all Greek June payables till the end of the month, and if the IMF is kicking the can you can be pretty certain the collective Eurogroup will join in. So nothing going to happen in June, perhaps July then..?

http://www.bloomberg.com/news/articles/2015-05-28/-pots-of-money-to-be-found-for-greece-to-pay-imf-roubini-says

Still waiting for some further misplaced depressive carnage though based on this scenario for EZ equities and if that's the case there will soon be a time to buy the dip as value can again be found in the sustainable 4-5% divvy range.

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Anonymous
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May 30, 2015 at 3:30 PM ×

Can see a scenario where markets are weak approaching FOMC and its a rip your face off rally into op-ex with the Greek can kicked down the road & ECB coming in in a big way. Politicians, central bankers & LB all rest up in their hammocks for July & Aug before repeating the circle jerk in Sept.

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Anonymous
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May 30, 2015 at 7:48 PM ×

We added markup to price quotes using hand signals and/or other internal arrangements or communications.

We have, without informing clients, worked limit orders at levels (i.e., prices) better than the limit order price so that we would earn a spread or markup in connection with our execution of such orders.

We made decisions not to fill clients’ limit orders at all, or to fill them only in part, in order to profit from a spread or markup in connection with our execution of such orders.

ENJOY YOUR WEEKEND PEASANTS. I AM UNTOUCHABLE. I WILL COME BACK ON MONDAY REINVIGORATED TO STEAL EVEN MORE OF YOUR MONEY.

Jamie Dimon

https://www.jpmorgan.com/pages/disclosures/fx_notice

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Dan
admin
May 31, 2015 at 5:39 PM ×

Have the USTs crashed yet? Has China crashed yet?

There is panic-buying going on in low-end (<= conforming mortgage) US RRE. This will refi a lot of garbage loans away from a lot of distressed holders. Since M2M disappeared six years ago, I do not anticipate a bunch of asset mark-ups, but the risk-transfer to FNM/FRE is a bonus for these institutions.

The contraction of the UST's deficit and the termination of QE is causing USD strength which means price inflation in non-USD economies in the face of recessionary-deflationary economic environments. Xi Jinping is going to have hell to pay if there is any contraction in food exports to China. There's nothing like a food shortage to disturb the peace.

The JPY squeeze just makes for a strong distortion to ride to correction.

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Anonymous
admin
June 1, 2015 at 12:37 AM ×

Hypocrisy knows no bounds...

I know I enabled this to happen but so what...

"Alan Greenspan, former chairman of the Federal Reserve, said a Social Security Trust Fund does not exist and that the U.S. is “way underestimating” the size of its national debt."

http://pjmedia.com/blog/greenspan-u-s-way-underestimating-the-national-debt/

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Anonymous
admin
June 1, 2015 at 3:06 PM ×

Whoa!!!
Century bond at a massive discount - 80c IPT
*PETROBRAS TO SELL $BENCH 100Y BONDS, IPT 8.85% AREA

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Anonymous
admin
June 1, 2015 at 3:08 PM ×

Prospectus doc for Petrobras' 100-year bond

http://www.sec.gov/Archives/edgar/data/1119639/000129281415001393/pbra20150525_424b2.htm

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