Currency Macro – Buy USDJPY – Update #3

Update of previous post 

  • Following partial close at 114.50 (FX weekly post), be wary of adding new positions now as risk sentiment is not friendly
  • Exiting long AUDJPY (currently at 80) position as current risk sentiment is not favourable for this pair in particular.
    • Firstly, there is a lack of positive drivers for AUD: relatively lower rates for AUD (compared against historical levels and against USD) and no expected pickup in growth rates globally.
    • Secondly, sentiment is turning to safe havens, which will hit AUD and increase JPY.
    • Thus the move in this pair may be the most amplified if the current factors continue to play out. Skew is therefore not great and it's better to stay away from this for now.

2018 USDTRY short

Short USDTRY on high yield, fading EM stress, and positive convexity

Entry @ 6.0 or better

P&L curve for short 0.1 lots USDTRY @ 6.0

Interest rates are at 24% in Turkey, and this yield can be harvested via buying the Turkish Lira, since most lack access to buy Turkish sovereign bonds.

1-year Forward rates are priced around 22% yield, and retail avenues can offer up to 17% in 1y swaps.

In addition to yield, price movements favour TRY gains if the stress in the EM region subsides, which is likely to pan out if a long term view is held.

Positive convexity adds to the benefits of the trade, and a hard stop loss can be set at 12.0 for an equivalent gain at 4.0.

Cryptocurrencies update

The self-perpetuating cycle has gone in reverse and it is clear now that the majority of holders were not willing to hold it for long term - i.e. they were only holding it for ST gain. Once the prospects of ST gain started to evaporate, the buyers disappeared as well.

Price drops were not only the result of selling, but an unwillingness of buyers to step in at market prices - they were only buying on much lower dips. This hurts the value for LT holders, as a lack of new buying activity has the net effect of depressing the price.

ETH and XRP are not getting the 'fundamental' boost from their ability to change things in finance, and it's clearer now (given BTC's resilience) that in the world of crypto, perception of status is more highly valued than potential of the coin, at least for now.

Going forward, the impetus for the coins remain to be seen translated into prices, and with the lack of hype, price gains will be difficult. It thus remains in the speculative and volatile category of assets, more fit for trading ST and too much uncertainty to be held LT.

Focus shifts to risks, benefiting safe havens

This half week has shown a continued shift in the narrative.

For the past 2-3 months it was USD buying which led the way, leading to consistent across-the-board weakness in all the majors against USD, and affecting EM currencies.

The past week saw a shift to safe haven currencies - pushing up the JPY and mildly the CHF. This week has played out to that tune so far, and it could represent a shift in sentiment that may last longer than warranted.

So although fundamentals for the USD have not changed (still supportive), the risks to USD longs are now materializing, leading to higher volatility and uncertainties in the short term - all the more important to have proper risk management in place.

The next opportunity might be in USD longs again when the situation settles down, but against currencies which have risen the most in this bout (likely the JPY). The other majors like EUR, CHF and GBP have seen their prices depressed enough already. There may be opportunities in AUD and NZD too.

Currency Macro – Buy USDJPY – Update #2

Update of previous post 

  • Resistance showed up strong at 111 - the partial close was very beneficial
  • Small re-entry can be done now at levels of 108.50
  • ST risks are racking up - focus is shifted now, away from USD fundamental buying to political risks - benefiting safe havens
  • For the longer term, be prepared to hold on to losses as it may take a while for USD fundamentals to push USD back up again
  • Positive swap enhances the trade so we're in no hurry to close it