It still “feels” like there is more shaking out to do. To me, it seems no-one really knows what’s going to happen next, but the markets appear wound up and primed to move.
With the BOJ end-of-Jan shocker to negative interest rates, plus further commitment to ease, the JPY got sold-off across the board; not a surprise. However, what stands out to me is the rate @ which those JPY losses have been recovered in the immediate near-term. In other words, how quickly money was shifted back into JPY.
Below is roughly the retracement %'s from the spike last month when the BOJ moved.
USDJPY- 62%
GBPJPY- 50%
EURJPY- 55%
AUDJPY- 90%
NZDJPY- 50%
We all know markets don’t move straight up and down, and that pullbacks are ‘natural’. Also, the JPY doesn’t trade in a vacuum. To me, the underlying theme is risk appetite…
Couple this with Chinese fundamentals, Oil, the stock market printing a significant lower high, volatility increasing, and heck, even the fact that we’re in an election year- and I just think we need to stay on our toes.
The JPY crosses are a good measure of global risk. When market participants are “risk-on”, you typically will see JPY-based-selling, equities rallying, etc. When risk aversion sets in, traders move to safe-haven assets and bring their money home (i.e. JPY buying). The USD has long since been seen as the safest haven of all; the reserve currency of the world. However, America is in big trouble. Primarily, our stock market and its’ participants have been hung up on cheap money and an almost risk-free bet buying the S&P.
As Peter Schiff says- the market since the GFC is like a heroin junkie, w/ the FED dosing just to keep the high. Remove the fix, and the junkie starts craving- eventually leading to either 1 of 2 things:
- A crash that will make '08 look like a pebble in the ocean
- The FED to re-introduce another round of QE to further artificially prop the market
I know this is simplistic, but it’s also illustrative.
The first scenario is actually the healthier one. Leverage is @ all time highs, and US-based fundamentals are appearing bleaker and bleaker as we move into the second half of this decade. Look what happened when the FED raised rates. Can this market / economy really survive 3 4 5 more hikes?
For the JPY…it’s pretty straightforward from a tech perspective. If USDJPY @ 116.00 is threatened, we can see some serious unwinding. In the interim, I’d take an approach to the tune of selling rallies, and being very cautious, precise and QUICK TO EXIT on any long side activities. Not crying wolf, but when “things” start the way they have this year, you need to be extra careful when your money is out there. Watch Oil, watch the VIX, watch the DJ Transports and get out of the way if something doesn’t feel right.