Waiting on the BOJ

Macro Man is writing on Monday evening, a few hours before the BOJ announces policy.  Relatively little is expected at this meeting, even though it is the first since both the Chinese devaluation and, naturally, the follow-on market volatility. In the interim, USD/JPY has dropped about 4 big figures while the Nikkei fell off its rocket ship to the stars.


While there is relatively little expectation for the BOJ to act now, ahead of its forecast round in October, they would surely get substantially more bang for their buck.   Indeed, though it now seems like ancient history,  the BOJ really changed the narrative in Japanese asset markets when it delivered a surprise stimulus boost last October.  It's easy to forget that USD/JPY was languishing around 107-108 and the Nikkei around 15,000 before the BOJ delivered its surprise.



Of course, one could argue that both the Nikkei and USD/JPY are much closer to fully priced, even with their recent pullbacks, and that the efficacy of another asset purchase program in steering the economy towards the central bank's stated goals will be minimal.  (Does that sound familiar?)

Nevertheless, the BOJ is not handcuffed, hamstrung, nor otherwise hampered in making its own policy adjustments to meet domestic objectives, regardless of what the Federales decide on Thursday.  And perhaps that's a salutary reminder that amongst all the angst for the Fed to take responsibility for the rest of the world, the rest of the world still has the responsibility to take care of itself.
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Anonymous
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September 15, 2015 at 7:43 AM ×

Recovery is just around the corner........

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Nico G
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September 15, 2015 at 10:24 AM ×

the Recovery word has been patented by current US administration

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Anonymous
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September 15, 2015 at 10:44 AM ×

As RBS summarizes it, "the Fed’s dilemma is a trade-off between shaking the tree today, risking that volatility and capital flight in EM may ‘spill-back’ into developed economies, or waiting and watching the fault lines deepen. Claudio Borio uses some economist humour to describe the issue: “All this is reminiscent of the old joke about the stranded tourist who, having asked for directions, was told: "If I were you, I wouldn't start from here."

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Rossco
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September 15, 2015 at 10:55 AM ×

Does Nikkei downside optionality provide a decent earner should the Fed blink and hold ?

The longer term trends in both the currency and the equities look a bit precarious IMHO

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Leftback
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September 15, 2015 at 12:07 PM ×

LB is in Madrid. Y viva EspaƱa. BoJ dovishness seems a given when one looks at its sickly Communist neighbor. USDJPY has plenty of room to wander upwards, or even to surge, and BoJ chatter would be a reasonable way of dampening the week's FX volatility. So a brief melt-up in USDJPY and attendant carry trades seems like a not unreasonable scenario. Here in the hammock, while we remain long only European equities as of now, we think that one more happy-clappy relief rally in Spoos and Nikkei might well be on the cards in the upcoming days and weeks.

Following a Fed hike, BoJ jawboning, etc.. and the consequent proposed 3-5% USDJPY move back up to resistance levels, the next most likely movement once that has run its course? In the absence of any USD driver would appear to be a substantial retracement by the USD and an accompanying rebound in "reflation trades" into EoY 15, as many of us have discussed here, and suggested by Michael Gayed among others:

Equity Melt Up?

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September 15, 2015 at 12:14 PM ×

Many on this thread have been contemplating long Brazil/EM before/shortly after Fed meeting. Taking the other side on that but go into some detail here...

http://crackerjackfinance.com/2015/09/brazils-economic-miracle-seeing-the-monster/

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Leftback
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September 15, 2015 at 12:17 PM ×

Nothing from the BoJ. That might be enough though, even if the Fed doesn't hike but just talks slightly hawkishly about October. It's the path of least resistance from here. With so many punters long short-dated vol, the other path of least resistance is a squeeze in Spoos. It is of course, US equity options expiration week. I rest my case. As for Treasuries, there isn't a very bearish or bullish scenario at the moment, but a squeeze in risky assets implies some mild short-term weakness for US govies?

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Leftback
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September 15, 2015 at 12:24 PM ×

CJ - We have been long and wrong Brazil for some time, so point taken, but current prices have that washed out low volatility look that has me wondering if your call might be a bit late in the day. The deflation monster unleashed by cheap oil isn't done, but MM and others here would join me in doubting that the monster will be allowed to roam the globe unchecked. A rebound in many reflationary asset classes is not only likely but inevitable at some point, given continued short positioning.

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September 15, 2015 at 12:33 PM ×

Sure, and my point was not tactics, more the structural flaws, and a review of what you actually get with the BOVESPA. One could simply assume that the corruption/fraud/governance issues get fixed, and that might ultimately be correct, but skepticism on EM mean reversion trades seems warranted. Don't disagree that a significant short term bounce would take place in any risk-on tape. I think short-term dynamics driven by what inning you think China is in.

Better link
Brazil's Economic Miracle; Seeing the Monster

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Anonymous
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September 15, 2015 at 12:51 PM ×

If the drop in August 2015, disclosed one troubling issue, it is the lack of liquidity. We have been warned time and time again of the lack of liquidity in the Treasury market. August, 2015 clearly discloses a lack of liquidity in the equity and futures markets. The market can no longer handle a market that turns bearish. Thanks to Dodd-Frank, the “market maker” was forced out, creating a major vacuum in a down market. If you noticed, the market action was down, stop, down, stop, no relief rallies. At some point the market will become untradeable.

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Booger
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September 15, 2015 at 1:11 PM ×

MM, to my mind, the real kicker to the BOJ QE expansion was the change in GPIF. Does anyone know when GPIF is scheduled to complete their rebalancing ? I suspect it has occurred and if this is the case it takes away a significant amount of flow JPY that is being sold.

What did you make of Kuroda's comment a few months ago that it is likely that the yen has reached a bottom in terms of real effective exchange rate? I thought that was an odd comment given his position.

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Skippy
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September 15, 2015 at 1:16 PM ×

Skippy is sympathetic to reflation trades. However, he remains in two minds simply because the S&P correction (from a pure price perspective) does not appear to be over. Rather, it does look like a text book consolidation/continuation pattern.

That said, the odds of a dovish Fed based purely on inflation risk perceptions and a potential bullish response from reflation assets seem reasonable.

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Macro Man
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September 15, 2015 at 1:19 PM ×

Booger, I tend to agree with him, and as I tried to allude to, that may be one factor staying their hand at the moment.

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washedup
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September 15, 2015 at 1:27 PM ×

CJ - thanks for the link - what kind of further price collapse from 75% off the highs would u like in the bovespa for u to see it as a good long term risk/reward? In my experience, when western newspapers abhor an EM and foreign capital wants out, has typically been the best time to buy (India in 1991, Brazil and Argentina in 2002 etc) - I do agree, and indeed have been a big proponent of the secular downshift in commodities - my struggle with brazil has been to identify companies that have nothing to do with oil or grains which have gotten chucked out with the rest.

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washedup
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September 15, 2015 at 1:39 PM ×

LB - see if u can urself some churros from st gines cafe - worth a trip to madrid by itself, I must say - safe travels.

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Nick
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September 15, 2015 at 2:30 PM ×

Is it time to revisit oil and grains discussion?

On oil, it seems that OPEC is trying to talk the price down. Is the main driver for this the competition inside OPEC or continuation of the price pressure on US shale?

Taking into account relative performance of the curves of WTI (flattening) vs. Brent (steepening) internal competition carries more weight.

Is this the best way for the cartel to approach US exports that get closer by day? May be no, as it seems the only constructive outcome of the recent OPEC policy is the strengthening of remaining US producers (efficiency and new markets/better pricing).

What is going to give? The price is not falling to 20 yet, if anything it is holding up well.

On grains, there is plenty across the world but there is no better cure for low prices than low prices. There is going to be some acreage reductions in the US next year. Consumers buying hand to mouth do recognise value here and once US harvest and yields are known there is some risk of consumer short covering. BRL vs. ags right now is moving in one direction but at some point after stabilisation the same logic will apply the other way.

Nick

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crackerjack finance
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September 15, 2015 at 2:52 PM ×

What does 75% off the high mean?

The BOVESPA is 57% above 2008 lows.

In 2008 you had fiscal surplus/less deficit, 6-years of QE, commodity inflation, artificially strong China on the come. The bovespa p/e was 11

In 2015; qt, China? Real? The P/e is 14. Earnings estimates are too high.

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washedup
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September 15, 2015 at 3:00 PM ×

CJ - sry I was referrring to EWZ as a proxy not bovespa directly - its weight in commodities has come down a lot so major weighings are now in ambev, itau etc.
Appreciate ur thts - nice blog btw.

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Macro Man
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September 15, 2015 at 3:04 PM ×

Also, a US based investor obviously also incurs currency risk, which EWZ captures but the local currency Bovespa does not.

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Anonymous
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September 15, 2015 at 3:04 PM ×

Happy birthday (of your collapse) Lehman Brothers. We have learned nothing since your fall.

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Anonymous
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September 15, 2015 at 3:24 PM ×

Draghi celebrating Lehman birthday collapse:
ECB balance sheet expansion accelerates considerably. Rose by €19bn vs €9.5bn the week before driven by QE program

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Anonymous
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September 15, 2015 at 3:50 PM ×

Stocks are already rallying on back of BOJ yen selling...
There will be a HUGE melt-up in equities when the Fed postpones it's rate hike on Thurs.
Watch these foolish shorts lose their shirts...

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Anonymous
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September 15, 2015 at 4:00 PM ×

Stocks are failing to break their recent range despite BOJ yen selling...
There will be a HUGE melt-down in equities when the Fed sticks with a rate hike on Thurs.
Watch these foolish longs lose their shirts...

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Mr. T
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September 15, 2015 at 4:08 PM ×

Brazil has been and will continue to be basically uninvestable for me. Partly thats because I have little confidence in the governments of S. America, and partly because the cost of risk factors associated with brazil outweigh any reasonable expectation of profit. Put another way, if I wanted to make a commodity bet there are much better options out there that don't carry the brazil-specific risks (if I wanted to bet on oil why would I use PBR as a vehicle?) The less factor-specific bets there still carry the country risk. S. America is just a single-digit PE risk group.

Somewhat interestingly, Russia & China also fall into the same bucket, although with even stricter risk-mgmt imposed constraints. Basically 0 risk limits there. I have to wonder how much of the India outperformance is from similar constraints people have elsewhere yet still throwing money at the BRIC concept?

Sure would be nice to be a fly on the wall for this FOMC meeting. With the street falling over each other finding clever new ways that the fed can save face and remain dovish it's clear they are in a box. The thing is as far as I can tell the primary reason for rate "normalization" is to have ammo to fight the next cyclical dip - noone seems genuinely concerned about asset price inflation, breakevens are not indicating anyone being behind the curve, etc. Given that a) there is pretty decent and growing chance of the dip coming soon and b) the amount of rate reduction required to have a counter-cyclical effect is far greater than the amount they are considering raising by and c) the fed has opened pandoras box of policy tools - I think the argument for "loading ammo" is very weak. At zero rates the fed will continue to find ways to shape the curves as they see fit with or without a drop in FFR. This leads me to continue to feel that the right positioning into year end is a risk-on cb inspired rally (again!). The noise about the economy is second fiddle to a permanent reduction in discount rates.

Lots of ways to position, one that is fairly new for me is I'm up to my eyeballs in the Macau gambling names. Any sort of TWINE model that looks at cashflows a couple years out shows quite a bit of value.

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Anonymous
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September 15, 2015 at 4:13 PM ×

Stocks prices are changing in a range, or not, because some currency exchange rate has moved, or not...
There will be a HUGE (or small, or medium, or some other adjective) re-pricing of equities when the Fed acts, or fails to act, on Thurs.
Watch these foolish longs or shorts (or those in between) lose their shirts, or make money...

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Anonymous
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September 15, 2015 at 4:36 PM ×

stock prices will be completely unchanged on thursday regardless of what the fed does.
both vol buyers and vol sellers will lose their shirts - the former because it won't go anywhere and the latter because the fools will hedge their gamma in a panic and chase the market both ways.

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washedup
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September 15, 2015 at 4:40 PM ×

Mr T - right there with u on macau stuff - las vegas sands - haven for the retail gambler - chinese GDP and FAI may be destined for mediocrity, but chinese consumption will be a hockey stick.

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Nico G
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September 15, 2015 at 6:26 PM ×

Mr. T there'll come a time when Brazil will be tradable cf. the Fear and Loathing of 2003 Lula (and cheap real) Quite lower from now though I'm going there next month to check some RE

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washedup
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September 15, 2015 at 6:59 PM ×

Yeah right Nico - due diligence on RE is exactly why ur headed to Brazil!
Here's a clip of Nico at copacabana next month - he is the guy playing the bongo....

https://www.youtube.com/watch?v=cCKxxnEP3zY

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Nico G
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September 15, 2015 at 7:21 PM ×

Bapu !... Brazilian girls are the most overinflated assets in the world... there are 40 countries with better (and much much classier) looking girls in this world but none of them had that 'copacabin marketin'

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Anonymous
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September 15, 2015 at 8:10 PM ×

While you all enjoy your beautiful brazilian assets, waht about good old Russia (RSX)? It looks to me that RSX had priced in enough the end of world events and should have some decent rebound if we believe EM as a whole needs one.

Why Russia is a better option than Brazil now: Putin at least has a much better domestic control than Dilma; and Russia is closely related to Europe and Brazil is closely related to China. EU is in a better position than China now, thus Russia is more desirable than Brazil in that sense.

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Nico G
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September 15, 2015 at 8:12 PM ×

the only problem being, there is no real accounting in Russia

it is absolutely impossible to know what value you are bidding

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Anonymous
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September 15, 2015 at 8:43 PM ×

2yr swaps have collapsed in last 24hrs

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Anonymous
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September 15, 2015 at 10:45 PM ×

"...one of the men told a subordinate that he needed to start lowering the bank’s Libors. When the more junior employee started to object, the first man told him the order had come from the most senior levels of the bank, who in turn were acting on instructions from the Bank of England...."

"...this means that not only do central banks trade FX on a day to day basis, something which has become increasingly clear in the past couple of years by merely observing the rigged market, but Citi was actively leaking this data to select clients!.."

"...one day a former Fed trader will give the full explanation of just how the NY Fed's market group manipulates the S&P500 on a day to day basis.."

http://www.bloomberg.com/news/articles/2015-09-14/was-tom-hayes-running-the-biggest-financial-conspiracy-in-history-

http://www.zerohedge.com/news/2015-09-15/explosive-allegation-citigroup-leaked-central-bank-trading-activity-select-clients

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Macro Man
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September 15, 2015 at 10:59 PM ×

Wow, Zerohedge managed to uncover central bank participation in FX markets only 8-9 years after I was writing about it here! Ironically, it comes at a time when they are probably less active in G4 markets than at any point in the last dozen years.

Also, it's amazing how the Chief Dealer of the BOE got thrown under the bus for the FX fixing thing, but Paul Tucker emerged unscathed from the 'BOE ordered LIBOR manipulation' thing. Just goes to show that it's not what you did, but who you know....

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Anonymous
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September 15, 2015 at 11:56 PM ×

@MM - totally agree.

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