* Overnight implied vol for today's BOJ meeting is higher (at 31%) than for any other meeting since the Abenomics revolution. This certainly suggests both a strong element of uncertainty as to the outcome and an expectation that the market move will be dramatic.
* Certainly, the move off the lows of the past week or so are suggestive of markets embedding hope of a policy shift into the price. The downside of that, of course, is that in the event of no move, that hope will need to be unwound. It certainly feels like this factor is bigger in this meeting than over the last few- hence the bid to vol.
* For choice, Macro Man thinks that they will do nothing. The BOJ isn't holding too many more cards, so they will have to play them judiciously. While Kuroda probably does not like then developments that he's seen, it's difficult to characterize them as either panic or a Japan-specific demand shortfall. As such, it's probably easy for other BOJ board members to argue that expanding QQE at this juncture would have at best a small impact on anything other than short term sentiment.
* That being said, it's difficult to fade the hope, simply because of the likely short term price action if they do do something. In fact, at current levels (i.e., with a reasonable chance of something priced, there will be a big reaction), it's probably fair to say that betting on the event may be a lousy Sharpe ratio trade in either direction...unless you want to pay that 31 for overnight vol!
* Certainly, the move off the lows of the past week or so are suggestive of markets embedding hope of a policy shift into the price. The downside of that, of course, is that in the event of no move, that hope will need to be unwound. It certainly feels like this factor is bigger in this meeting than over the last few- hence the bid to vol.
* For choice, Macro Man thinks that they will do nothing. The BOJ isn't holding too many more cards, so they will have to play them judiciously. While Kuroda probably does not like then developments that he's seen, it's difficult to characterize them as either panic or a Japan-specific demand shortfall. As such, it's probably easy for other BOJ board members to argue that expanding QQE at this juncture would have at best a small impact on anything other than short term sentiment.
* That being said, it's difficult to fade the hope, simply because of the likely short term price action if they do do something. In fact, at current levels (i.e., with a reasonable chance of something priced, there will be a big reaction), it's probably fair to say that betting on the event may be a lousy Sharpe ratio trade in either direction...unless you want to pay that 31 for overnight vol!
10 comments
Click here for commentsMM - what specific market are you referring to in the article? What is the 31% implied vol on? Sorry if its obvious.
ReplyThx.
Sorry, USDJPY is 31 vol
ReplyPerhaps Kuroda will simply do a Draghi, in other words, nothing now but hinting at future QQE expansion should conditions deteriorate. Jawboning seems to be the order of the day at the moment, the Fed still mindlessly jawboning the USD higher for no apparent reason, Dr Aghi jawboning EUR lower for very obvious reasons, and Kuroda keeping shtumm for the time being. It feels as though hints of future bazookas might be the most likely outcome and therefore being long JPY might not be the smartest move right here. Better to let the longs be cleaned out here while we are in the middle of the 116-120 USDJPY trading range? Tag 120 and then look to short USDJPY and Spoos into the back end of next week ahead of US data (Cough: NFP number). Your own charts have suggested this strategy of late. What say ye, MM? [Yes, I am trying hard to be irritating this week and succeeding].
ReplyJapanese certainly is crazy enough, isn't it?
ReplyWell does that count as an all in ?
ReplyKuroda goes NIRP. Never, ever bend over in front of the BoJ, Mr Shorty!
ReplyIndeed! A clear message to Yellen and Carney too. "Go on, hike if you must!"
ReplyCV- don't think carney is as hawkish as yellen (And that's saying something)....
Replypost jpy easing risk rally is going to be a gift to get your bearish bets in on equities (to be fair I think we are range bound in spooz through the end of earnings season). this is just going to stoke further devaluation of the yuan and other EM currencies, resulting in damage to spx earnings and crude. I know consensus on the site here is that crude has bottomed because it's failed to break lower on bad news, but that has happened a couple other times during this drawdown. I wouldn't look at it as a signal that we are about to rocket or anything.
at some point the market will realize that qe doesn't help, nirp doesn't help, and the problems are structural. the only way to reflate risk assets here on out now that conventional monetary policy tools have been exhausted is if cb's push massively out the risk curve and buy equities (japan already on this path and recently increased percentage that was equities but not enough to make a dent) and corporate debt.
The only way forward in the developed world is fiscal policy, not monetary policy.. In the meanwhile, it doesn't pay to fight the major Central Banks doing their monetary policy experiments (yes, they may well be doomed to fail but maybe not just yet!) -- as I have said here before. Short Nikkei? No. Short usdjpy? Come on...there are easier trades out there. Short SPX -- closer to 2000, purely on fundamentals, not here. And nobody knows a damned thing about what the Chinese are going to do, not even the Chinese themselves. Everyone's an expert on China nowadays -- the Dunning-Kruger effect in full force, it seems, in macro world.
ReplyAgree on fiscal policy. Looking around the US, the transportation infrastructure is a disaster and that's the obvious place for stimulus, but there are many other "shovel ready" projects out there waiting to be done. The obstacle to such projects is the gerontocracy that runs US politics. Until then, NIRP, QE, QQE is all we have.
ReplyTrades? Yes, at some point we see shorting Spoos, but no probably not here. It's going to be another rough day for shorties. Oil, spoos and Usdjpy seem determined to run a few stops here before reverting lower once again.