Trading interest

Long USDJPY with stops south of 110.50 – open target

Abandoning EURGBP with stops above 0.8400

The USDJPY move yesterday was an earthquake that deserves our undivided attention and may prove the start gun for a significant expansion of market volatility after so many months of declining market trading ranges and implied volatility in options – to record lows nearly across the board, in the latter case. On Today’s Market Call we quantified the significance of yesterday’s move as the single largest one-day rally in “violence” terms if we measure the 1-day close-to-close move as a multiple of the recent ATR (50-day EMA of that indicator). At 3.4 ATR, this is the largest single largest “real” close-to-close rally adjusted for local volatility conditions in more than 20 years. We say “real” because there were four moves of similar or larger size in the 2010-14 period, but two of these were linked directly to major Bank of Japan meetings in which Kuroda made significant policy announcements, and the other two were Ministry of Finance intervention moves against prior bouts of JPY strength.

What is promoting the JPY decline? We saw Japan printing one of its worst GDP numbers (-6.3% annualized) in Q4, an ugly data point but one that many were willing to write off as linked to the sales tax hike in October as a similar pattern developed over the last major sales tax hike in 2014. But we all have our eyes on risks for this quarter’s numbers on the fallout from the Covid-19 virus and the risk that lingering concerns for travel and activity in general could persist for another quarter or more beyond this quarter and thus through Tokyo Olympics, etc.

As a side note, let us recall that the Bank of Japan has been the world’s most aggressive user of QE and has grown its balance sheet to over 100% of the Japanese economy, injecting plenty of liquidity into the system, but liquidity that has largely sloshed elsewhere on parlous growth prospects domestically. Looking at a gold-in-JPY chart, we have seen an incredibly aggressive ramping to all time highs that has only accelerated recently suggesting that Japanese investors may be losing faith in domestic assets and piling into US momentum equities (likely not hedged) and now precious metals and that stimulus measures from Japan will be too weak to matter.

What will this USDJPY move mean? It could mean a further ramping in the US dollar that forces the Fed to cut rates to the bone eventually – let’s recall the 2018 experience in both USDJPY and risk appetite and how that unwound in late 2018 and into early 2019. The question is whether the market finds solace in Fed easing or jolts into a new phase of concern that global growth is on the rocks and the central banks are doing too little too late.

Chart: USDJPY weekly

Yesterday’s USDJPY breakout turned into an incredible move higher, especially relative to recent calm. Technically, the break could not be more forceful, both in terms of the local range, but also on the basis of trend-lines. The next flat-line area of relevance is the 114.50+ area that capped the action since early 2017.