USDJPY: Triangles all the way up
The honey badger is notorious for its strength, ferocity, and toughness. It is known to savagely and fearlessly attack almost any other species when escape is impossible, reportedly even repelling much larger predators such as lions and hyenas. Bee stings, porcupine quills, and animal bites rarely penetrate their skin. If horses, cattle, or Cape buffaloes intrude upon a honey badger's burrow, it will attack them. (Wikipedia)
The US dollar is the honey badger of currencies this year and yet everyone seems to want to fight it. The vibe now is that EUR and GBP “can’t go down” and while they are certainly not going down, I think it’s more likely that this is yet another consolidation before the next ramp higher in the dollar.
There is a lot of inflation out there, even if you strip out all the usual suspects. Here is Atlanta Fed sticky core, ex-shelter, vs. US 10-year yields. It has not been a fader’s market this year and I don’t think this week will change that.
Kuroda-san’s BOJ is directly at odds with the MOF now as they are doing rate checks as he continues powerful easing in the face of rising inflation in Japan. Core is still pretty low there (1.6%), so the message remains that it’s too early to take the gigantic foot off the YCC gas. The market is buying BOJ lotto tickets (short JGBs, short USDJPY) every meeting because the end of YCC could be such a juicy trade, but it seems to me it’s still too early. Nikkei and Reuters sources are usually pretty good on the BOJ, and they are still saying no change to policy at this meeting.
For example: BOJ is nowhere near shifting monetary policy to support yen (Reuters) and BOJ set to end COVID-relief plan, but no change to loose policy (Japan Times). Going into the BOJ and Fed meetings, there seems to be very little fast money appetite for long USD positions. With rates here, inflation a massive problem for the Fed still, and Fed policy still wildly loose after more than a year of inflation above target… I think the USD should just keep going higher along with yields. New highs in 2 and 10-year yields open the door for a retest of the MOF’s 145.00 level.
USDJPY vol is expensive, for good reason, as 1-week USDJPY vol trades around 16%. But with the clear triangular consolidation happening, I think long USDJPY is fine via spot. USDJPY is known for its triangular consolidations, even as far back as Abenomics in 2012. There’s another one forming and the beauty of these triangles is that they make risk management relatively straightforward. You go long here (143.65) with a stop somewhere below the 14SEP low of 142.58 and the bottom of the triangle. I am using 141.74 as my stop loss to allow for a little excess volatility around this week’s central bank fest. If the BOJ were to move YCC, there is gap risk, but I think you would probably get out somewhere on a low 141 handle.
I placed the take profit at 145.98, which is a new high by about 100 points. Each new big figure high is going to be a point where risk of MOF rate check increases, but until the BOJ changes their aggressive easing policy or US yields fall precipitously… The USDJPY path of least resistance is up.
This is an excerpt from my daily. Thanks for reading.
The US dollar is the honey badger of currencies this year and yet everyone seems to want to fight it. The vibe now is that EUR and GBP “can’t go down” and while they are certainly not going down, I think it’s more likely that this is yet another consolidation before the next ramp higher in the dollar.
There is a lot of inflation out there, even if you strip out all the usual suspects. Here is Atlanta Fed sticky core, ex-shelter, vs. US 10-year yields. It has not been a fader’s market this year and I don’t think this week will change that.
Kuroda-san’s BOJ is directly at odds with the MOF now as they are doing rate checks as he continues powerful easing in the face of rising inflation in Japan. Core is still pretty low there (1.6%), so the message remains that it’s too early to take the gigantic foot off the YCC gas. The market is buying BOJ lotto tickets (short JGBs, short USDJPY) every meeting because the end of YCC could be such a juicy trade, but it seems to me it’s still too early. Nikkei and Reuters sources are usually pretty good on the BOJ, and they are still saying no change to policy at this meeting.
For example: BOJ is nowhere near shifting monetary policy to support yen (Reuters) and BOJ set to end COVID-relief plan, but no change to loose policy (Japan Times). Going into the BOJ and Fed meetings, there seems to be very little fast money appetite for long USD positions. With rates here, inflation a massive problem for the Fed still, and Fed policy still wildly loose after more than a year of inflation above target… I think the USD should just keep going higher along with yields. New highs in 2 and 10-year yields open the door for a retest of the MOF’s 145.00 level.
USDJPY vol is expensive, for good reason, as 1-week USDJPY vol trades around 16%. But with the clear triangular consolidation happening, I think long USDJPY is fine via spot. USDJPY is known for its triangular consolidations, even as far back as Abenomics in 2012. There’s another one forming and the beauty of these triangles is that they make risk management relatively straightforward. You go long here (143.65) with a stop somewhere below the 14SEP low of 142.58 and the bottom of the triangle. I am using 141.74 as my stop loss to allow for a little excess volatility around this week’s central bank fest. If the BOJ were to move YCC, there is gap risk, but I think you would probably get out somewhere on a low 141 handle.
I placed the take profit at 145.98, which is a new high by about 100 points. Each new big figure high is going to be a point where risk of MOF rate check increases, but until the BOJ changes their aggressive easing policy or US yields fall precipitously… The USDJPY path of least resistance is up.
This is an excerpt from my daily. Thanks for reading.
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