This was an interesting week in FX markets.
And that’s probably an understatement.
Equally interesting is the breakdown of FX positions from the latest CFTC data, out Friday and current, as usual, through Tuesday.
Last night, while you were getting drunk (count me jealous), we brought you the latest on positioning in the euro (where net long positioning hit a six-year high just ahead of the ECB meeting) and the loonie (where specs finally flipped long, closing the book on an extremely painful adventure in CAD shorting gone horribly awry). You can read those posts here:
- Has This Trade Gotten Too Crowded? Specs Now Most Long Euro In 6 Years
- Loonie Tunes: Closing The Book On A Short Gone Horribly Wrong
Well there were more notables.
Specifically, yen net shorts ballooned to their most extreme since January 2014:
That of course came ahead of Thursday’s BoJ meeting at which Kuroda reinforced the notion that he fully intends to go down with the NIRP/QE ship.
Here’s the thing about the yen. Because 10Y JGB yields are anchored, USDJPY trades almost entirely on 10Y Treasury yields. So one could obviously make a compelling case for shorting the yen based on the policy divergence theme. The Fed hikes and the balance sheet runs down while the US economy continues to recover, thus US yields rise while JGB yields are anchored, etc. etc.
But – and this is a big “but” – Trump is fucking that up. His inability to get anything done combined with jitters about the Russia probe are conspiring to keep a lid on US yields. In the final analysis, this could end up forcing the Fed to back off of normalization as fiscal policy proves utterly unprepared to take the baton from monetary policy.
So Kuroda standing pat isn’t enough. In order for the policy divergence theme to play out, we have to see i) the BoJ do something new in terms of accommodation, ii) the fiscal policy outlook brighten in the US, or iii) both. Until then, we’re going to be stuck:
“JPY is expected to remain broadly defensive as the BOJ anchors policy rates near zero,” Bloomberg noted on Friday, and to be sure, there are other cross trades at play here.
But the common sense take here seems to be that betting against the yen in an environment where a risk-off-ish Trump headline could hit at any moment and in which geopolitical land mines are strewn all over the global landscape, is anything but a “no brainer.”
Of course this is all set against a fraught political backdrop in Japan. Here’s Deutsche Bank:
The Abe government’s approval rating had dropped to below 40% in polls by major media outlets including NHK, and a subsequent Jiji Press survey now puts approval at 29.9%. In general, a rating in the 30s is viewed as a caution signal for an administration’s viability, while a drop into the 20s could be terminal. All the recent polls indicate disapproval ratings of around 50%, substantially above the approval figures. Abe faces the worst challenge of the four and a half years of his second stint as PM.
Be that as it may, DB (in a separate piece), concurs with our assessment above, noting that “the main risk at this juncture is that of the yen strengthening once again if overseas growth and inflation slow sufficiently to drive down interest rates.”
“We need to carefully watch the political risk surrounding President Trump as people’s interest could also shift to U.S. trade issue and North Korea, which could put upward pressure on the yen,” Naoto Ono, currency analyst at Ueda Harlow in Tokyo, wrote in a daily commentary out Thursday.