A few thoughts on yen

What a difference a few miles makes.   While Washington and New York were buried under some two feet of snow, Macro Man's town (some 50 miles from NYC) got 10 inches, and a town 20 miles north got five.  Vermont, where so many locals go to ski on the weekends, got none.  Perhaps that's Nature's version of a pairs trade gone badly wrong.

In any event, the new week is here, with punters still wondering if this is still the end of the world....or the end of the sell-off.  There are a lot of charts that look the same, with price action since December resembling something of an inverted Nike swoosh.  Over the past few years markets have become accustomed to V shaped recoveries in many assets; well, other that oil, the "recovery" of which has resembled a lower-case eta.

On the face of, though, if you are of the belief that nothing's changed, current pricing still represents a nice buying opportunity.   Indeed, last week saw levels of risk aversion that are usually conducive to stepping in and taking the other side.   Macro Man's proprietary risk indicator, which he finally got around to updating over the weekend, registered a 2 standard deviation risk aversion event, which usually marks a bottom....




...well, unless it doesn't.



Still, Macro Man is operating under the thesis that markets are still functioning, even if liquidity is poor and pricing erratic, as is generally the case during episodes of risk aversion.   In other words, you can generally get a price, even if you might not like it.  (If all holders of energy high yield asked for the bid, on the other hand, that might no longer be the case.)


As such, he can kind of understand why one might wish to dip their toe in, say, USD/JPY.  Last week it tickled the lows of the past fifteen months, and while it's well off those lows now, at least you know where you're wrong:

Moreover, CTAs (proxied by the IMM) are actually long yen for the first time in forever; well, not literally forever, but at least for the first time since "Abenomics" became a thing.

Moreover, there's a BOJ meeting on Thursday, with little expected after Kuroda kind of pooh-poohed the need for more easing in Davos.  It's all upside, baby!

Well, perhaps, in the near term.   Then again, perhaps not.   Macro Man's research has long suggested the avoidance of FX carry trades as long as the risk index is negative, which it clearly still is.   Of course, a 100 points in the Spoos could happen in a couple of days and take the index back to neutral, so that reasoning isn't exactly etched in stone.

On a more structural level, there is reason to be concerned about being short yen.  Obviously a world of higher volatility naturally lends itself less freely to FX carry trades than the vol-suppressing  climate that we all "enjoyed" over the last several years.   The yen has form, as well; it strengthened nicely against the USD in the six months after the inaugural rate hikes in 1994 and 2004.

Perhaps more fundamentally, Japan's post-Fukushima trade deficit has finally closed and moved back into a tiny surplus, as reported last night.   Over many years, this has been Macro Man's favourite determinant of the trend in USD/JPY, albeit with a lag.


Granted, a lot of the improvement has come from a decline in imports, but that's just the thing; one of the reasons that the trade balance collapsed into deficit after the earthquake was because of the shift in Japan's energy profile towards the importation of fossil fuels.  The sharp decline in the oil price has represented a tremendous terms of trade boost for Japan.  Back in the old days when we cared about quaint notions like "external balances" rather than the apparently complete abdication of any factor outside of "risk on/off" and "central bank monetary policy", this would have been a big deal. 

Who knows?  Insofar as macro factors are playing an increasingly prominent role in asset price determination from China to Brazil, maybe it's time to dust off the old playbook.  As such, given the swing in trade and the general level of valuation, you can put Macro Man in the "sell on rallies camp" for USD/JPY....somewhere north of 120 would suit very nicely, thank you very much, perhaps on the back of CTA stop outs?  In the meantime, he can afford to be patient; macro factors play out over months if not years; the key is to pick a good entry level and stick it in a drawer.  Eventually, you'll open it and get a nice surprise.
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amplitudeinthehouse
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January 25, 2016 at 8:14 AM ×

" In the meantime, he can afford to be patient; macro factors play out over months if not years; the key is to pick a good entry level and stick it in a drawer. Eventually, you'll open it and get a nice surprise." Yeah..I'm about to fork over 500 dollars for new textbooks, what's that telling ya! Leave a poor pleb alone.

ps..Please select your bicycles to prove your not a robot "I kid you not"

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Leftback
admin
January 25, 2016 at 11:55 AM ×

I like this analysis and the game plan. For the time being, we still think of USDJPY as a range trade, b/c, well. look at the charts, it's in a range until it breaks, by definition. But we also think that the next time this range breaks it will be down, and hard, with all of the attendant risks that go along with that FX event. We are not there yet, but when Dame Janet finally waves the white flag in March, perhaps? By that time, we think we will already have seen the USDJPY break the 116 support level.

Right now, markets seem to be engaged in digesting last week's drama, in a process of backing and filling that typically follows big recovery days, and that usually precedes constructive price action.

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Booger
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January 25, 2016 at 12:41 PM ×

The rationale is good MM and it is an interesting question. I wouldn't take it though. The BOJ may well expand QE until they get inflation or Abe gets elected out.

Kuroda has been a bit MIA lately. He has probably been contemplating which Yoda aphorism to take. Having spent last week thinking "Size...matters not", with the recent ramp the Nikkei and dump in JPY one wonders whether he has gone with
“Do. Or do not. There is no try.”

Anyway, I don't want to be on the other side of a Japanese QE expansion announcement, they just might be crazy enough to do it.

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Booger
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January 25, 2016 at 12:47 PM ×

If the Europeans expand QE, the pressure will be on for the Japanese to and that will put pressure on the Chinese. It would be pretty amazing if the Fed tightened into that but the effect on the dollar would probably be spectacular. I would prefer to short Spoos than USD.JPY purely due to the near term potential for Euro and Japanese QE expansions.

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January 25, 2016 at 12:54 PM ×

Don't want to be boring... but no relief for banks in Europe... more QE=more banking crisis.
Good work DrAghi

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Burr cold in Canada
admin
January 25, 2016 at 1:44 PM ×

High pressure over Canada has pushed some of that snow to the East toward the Atlantic. -21c here on Saturday night.

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hipper
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January 25, 2016 at 2:26 PM ×

Funny how short USDJPY, short USDEUR and short oil are and have been related with risk off. Might have been somewhat so in earlier years as well but perhaps more loosely. If the pattern were to hold for a longer time the JPY scenario which MM presents could be pretty worrying in the big picture.

LB, are you still long in those preferred mREITs? The book value discount on many of them look great but just wondering how seriously the flattening curve will start eating into their margins. It that were to happen consistently it might make sense that some of them start liquidating.

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Anonymous
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January 25, 2016 at 3:04 PM ×

Stocks will go up here because the BOJ, PBoC and ECB have no choice but to print money.

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Anonymous
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January 25, 2016 at 4:06 PM ×

Anon3:04

Wasn't that the case when the markets were going down during the last couple of weeks?

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Leftback
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January 25, 2016 at 5:33 PM ×

He's right. The CBs are all boxed in, it will be QE somewhere for a heck of a long time and Lower For Longer in rates. Deflation is Death to all of these institutions and they will fight to the last with every tool at their disposal, and that's a lot of Tools.

Hipper, mREITs are going to sit on their portfolio for ever, and they will continue to make money and pay out juicy dividends. The preferreds have been an easy ride for years already, you just sit and make 8%, then you dive into the common when the dividends are ridiculous, like 12-15%. Look, I am convinced there will be a monster rally in these, once people realize that four hikes in 2016 is three or four too many and the front end of the curve pancakes again. Right now these mREIT stock prices are pricing in rate hikes that will not happen, and once the 2y dives down to 50 bps or lower, everyone and their Uncle will pile in.

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Macro Man
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January 25, 2016 at 5:45 PM ×

LB, the one part of the mReit business model that you omitted is leverage, which is of course great when it works and brutal when it doesn't. I suppose the question is from here, what will happen to levered borrowers if circumstances dictate the policy outcome that you forecast? I mean, the share price of many of these things has sucked for several years, which mirrors the earnings streams, much of which occurred during favourable monetary conditions. I am far from an expert, mind you, but I've watched NLY firsthand for 15 years. Flat and low yield curves are not great for these guys, especially given how tight banks are with balance sheet these days.

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January 25, 2016 at 6:08 PM ×

Exactly mm...but i'm looking at Redwood trust..big discount to nav but they're losing on hedging side.. Leverage and spread widening is hard to digest sometimes

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Anonymous
admin
January 25, 2016 at 6:15 PM ×

Anon 3:04 here... we can see equities moving up again now, driven by BOJ, shaking off bad oil price action. The mantra is: print, debase, buy equities...

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Anonymous
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January 25, 2016 at 6:24 PM ×

How much money have macro folk made in the last 5 to 7 years fighting major CBs?? Oh.

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Anonymous
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January 25, 2016 at 6:56 PM ×

Felix Zulauf: "It started last spring with a stealth bear market. The first leg down occurred last summer, and a recovery attempt failed. Now the second leg down has begun. There might be a bounce, but then the selling will resume. I expect three down legs from last year’s highs. I am not saying the S&P 500 will fall 50%, but 1600 is my minimum(!) downside target, and I expect the market to hit it this year. Investors should stay as defensive as possible. If you have to stay invested, stick with sectors such as consumer staples and utilities. This will be an extremely bad year for investors. Hopefully, it will yield many investment opportunities in 2017."

"I don’t expect the Fed to hike rates further this year. Instead, Fed officials will bring their dots down. The U.S. dollar remains too strong versus emerging-market currencies. It doesn’t make sense to hike rates and make the dollar even stronger.

From the latest Barron's roundtable ...

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Leftback
admin
January 25, 2016 at 7:05 PM ×

We actually agree with most of that, but as always the bounce will be bigger and longer lasting than most expect. Range trade and sideways chop ahead, we are setting up at the moment with supports SPX cash 1890 and 1900, resistance 1920 and 1940.

Some kind of dollar shorting/hedging is going to work in 2016. The Fed will definitely bring their dots down, and as always they will be behind the action in the FFR futures market. Beneficiaries are likely to be EM FX, miners, oil and precious metals.

Our mindset this year is to be getting pretty defensive whenever it is very happy-clappy out there, and to only put on more risk when the world is ending, the sky is falling, and the Chicken Little show is all over the TeeVee.

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Anonymous
admin
January 25, 2016 at 8:33 PM ×

My "bell" for The World is Ending is when the next downdraft hits and the airwaves are full of commentary about how stocks are dead because the Baby Boomers are getting out and staying out.

I expected that would have happened by now, though...

- Whammer

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Anonymous
admin
January 25, 2016 at 9:02 PM ×

Looks like we need a new resistance in SPX cash.

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Anonymous
admin
January 25, 2016 at 9:09 PM ×

@Anon 3:04,

Please explain why stocks go down today, thank you!

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abee crombie
admin
January 25, 2016 at 10:28 PM ×

MM and gang. Take a look at yen crosses and the trade weighted yen. It's below Kuoda levels. Nikki is below second QE levels. I love the Japan trade but something isn't working. Maybe time for negative rates? Though on PPP basis yen is cheap.

Anyways it's still a dollar story. Like lb said we need to fed to backtrack, which the market is already doing. But I doubt Hellen will. But it will be interesting to watch.

Forget NLY their mgmt sucks. I like TWO better, less leverage. Or cys bigger discount to book.

All the Bears seem to point to the same China capital and debt deflation narrative. zoulof's full interview is instructive of his case. But I am not fully convinced.HELP Convince me please ;)

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hipper
admin
January 25, 2016 at 10:30 PM ×

Quite chilly predictions from Felix Zulauf here. The straightforward arguments do actually seem sensible and makes you wonder if there's yet a bigger bullet to be dodged before the year end:

http://www.fuw.ch/article/from-buy-the-dips-to-sell-the-rallies/

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Anonymous
admin
January 25, 2016 at 11:14 PM ×

I check the Bogleheads forum to see when they start capitulating ...

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Anonymous
admin
January 25, 2016 at 11:15 PM ×

I check the Bogleheads forum to see when they start capitulating ...

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abee crombie
admin
January 26, 2016 at 3:19 AM ×

"A typical bear market in the US since the Second World War was about 23%. However, this time around I expect a more vicious downdraft. I expect the S&P 500 to drop to a range of 1200 to 1400 – right now the index stands at about 1870. Compared to its all-time high that’s a correction of almost 50%. The German Dax could fall to around 7000, while the Swiss Market Index will see a similar down-leg. There is a real chance of a bigger correction than many investors realize. This is particularly true when there is a weak economy – which I expect. "

come to papa ;-0. I will gladly buy AAPL with a 5 PE and IG bonds yielding 10%. It feels like FOMO to the downside. Maybe S&P will go to 0 and we will have negative commodity prices... yet somehow 10year notes are still in the same damn range for the past 2 years ;-)

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Leftback
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January 26, 2016 at 5:48 AM ×

The Fed needs to dial back this rhetoric, according to Jeff Gundlach, and drop the idiotic idea of hiking eight times before 2017. We tend to agree......

Dial It Back, Janet

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Eddie
admin
January 26, 2016 at 9:09 AM ×

Abee,

I give it a try if you don't mind.

Imo the China story is broken. A year or so ago almost everyone was staggered by the old wise men controlling the economy as they liked. Granted, their GDP figures were probably inflated but they kept importing and exporting as ever which was good news for commodity and machinery exporters and also for everyone importing cheap and not so cheap gadgets. Since their ham-handed handling of the stock market rout the whole story changed and all of a sudden they don't have control over anything. Probably the same exaggeration as before.

Now it looks like they import less which is bad news for Australia, Germany and the like and in turn for other countries doing business with them. Otoh the US suffer from the strong USDCNY. I know that direct imports from China are relatively small but the other Asian countries compete to some extent in similar markets and should fell the pressure, too. It is those indirect links (via some third countries) that worry me because we cannot easily see them. Right now Japan takes a hit, USDJPY is at levels that Kuroda probably doesn't like, so I wait for his next stunt. Imo the Asian countries are currently in a currency debasement spiral with the USD being on the receiving end. Which means that the deflationary pressures that exists in China and Japan will be exported. Not so good news for those who are highly indebted.

I have been bearish on China for quite a while so feel free to take my thoughts with a pinch of salt :).

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