Perhaps @Matt Daniell or @Weston Nakamura could talk about the divergence here ?
Liked by Matt Daniell and 1 other
In The Exchange you can ask and answer questions and share your experience with others!
Sorry having major IT issues last few days here (still am - need @John Ahearn and not for financial markets insight this time, need him for his other side job expertise)
@Christopher Moir ! Good to see you back in action - and indeed CTAs but also hedge funds flipped net long to aggressively net short ¥ at ‘21 start. As far as March is concerned- you have 2 things which I indeed was incessantly pointing to at the time on the Exchange as well as on RVDB: the YCC’ers and Japan real money flows. RBA’s first real YCC battle with AU3Y up to10Y yields testing RBA’s limit, RBA coming in to crush the back end of the curve + BOJ officially widens then ultimately removes any upper band cap on JGB yields first time since BOJ YCC instilled half a decade ago = yield volatility on both the AUD and JPY side of AUDJPY = very very suddenly not good for long AUDJPY carry trade. Then real money flows - ie Japan UST buyers. End of March is Japan fiscal year end (as @Matt Daniell points out for AUS now) and leading into that period, you see all sorts of squaring up rebalancing and Corp repatriation of yen earnings and UST selling etc to clean up the books for FY earnings, only to re-deploy on April 1 start of new FY. This year due to the UST sell off, Japan real money was both the force and the follow on momentum, FOMOing out of USTs starting in Feb, well before they usually would in March to mitigate mark to market losses on USTs (japan the largest creditor to US so these flows are the most significant among foreign USTs and therefore the primary UST related flow with an FX impact as well - as US based USD denominated UST investors buying/selling USTs don’t have a USD FX impact). And then like 10 other things.
@Jeremiah S good observation, few things. First just FYI you should use ES (SPX emini futures) rather than the SPX cash index, because that daily open/close stamp is 9:30am/4pm EST, whereas FX markets trade virtually round the clock. It’s less noticeable on a 1D tick chart (as fx day’s close isn’t too much after US cash equity close) but still more accurate to compare emini futures schedule trading overnight US with fx.
then you have to look at where you start your chart, and identify the various “regimes” and start there, or from a specific catalyst point (like a central bank meeting of consequence etc), or else it’s an arbitrary starting point and will cause confusion when charting out.
also for the purposes of AUDJPY vs eminis/spx, the AUDJPY thing isn’t specifically SPX only, it’s for risk assets (DM equities), which really is NKY more than SPX on a relative basis, but I reference SPX as the general representative of global equities if I had to pick one index. AUDJPY carry traders are by and large japanese, and they generally favor US over japan equities but still have local “bias” like everywhere else (Wherever you live you think of “equities“ as whatever your domestic equity market is).
and then as I mention above, the dynamics of RBA joining BOJ in becoming the only 2 major CB doing YCC on March 16(?) 2020 last year, pinning their respective yields down meant no rate fluctuation / volatility on both AUD and JPY, yield vol is the on risk that levered carry traders care about and now RBA just “eliminated“ it in March’20 - so carry traders went levered long AUDJPY carry, and then use the proceeds to invest to risk assets. Well, March’20 when you get the all clear from RBA (days before Fed), then you look around and see what’s cheap (everything is at thst point), then you get the all clear from the Fed, youre gonna go long equities and not stop going long as long as the RBA & boj are “guaranteeing” controlling their respective curves. fast forward to March this year, the aforementioned happens with boj widening the YCC upper bound snd RBA struggling with capping their yields = very different picture for levered long AUDJPY carry → risk assets (after a massive run up in both), and that trade starts to unwind. This is when/why I closed my NKY outperform longs (that was correct) and closed my spx “4 & 40” trade (that was correct from a trade perspective as I was long SPX 4K calls now ATM, and long those calls since SPX was 3k) but “incorrect“ on “SPX top” (I was partially incorrect as I specifically said not buying puts on SPX / not bearish, but unconditional ↑ days might be over - SPX still not done being unconditional ↑)
For the regimes- there are a few (actually there are a lot), but let’s go with post US election+Pfizer COVID era starting nov’20, as that was when I went / called loudly for long NKY to play DM equities, and I hadn’t made a long nky outperform call in years. So starting nov20, here’s how AUDJPY looks:
combining ↑ into one with NKY & SPX normalized % ↓
you can see a few things. There are periods when AUDJPY diverges to outperform stocks, and vice versa like now. And then- “like now” - yes perhaps for SPX, but is that the case for NKY? Seems NKY is maintaining directionally with AUDJPY currently. Is that a potential leading indicator? Maybe- i opened a short AUDUSD on CME futures a few days ago as I told @Matt Daniell (im closing that & taking profit soon btw Matt). but if this continues where AUD, NKY, copper and bond yields ↓ and SPX is still ↑, I’m going to be looking at taking a swing on SPX puts. this is what it looks like from March’20 RBA YCC:
notice NKY stair steps ↑ then tops and flattens in June‘20 (June FOMC), then again ↑ (nov20) then tops/flattens (mar21). I used AUDJPY as a very key guide for nailing the NKY call from start to close, and a slightly less but still key guide for SPX. and SPX might look shaky now
Really helpful dude! Thank you!
the NKY is really clear now. So with the whole YCC, its basically which bank will devalue against the other more which pushes the currencies and thereby determines flows into risk assets?
Does NKY continue to move up with momentum similar to SPX? Because it seems like Euro Stoxx 50, DAX, and NKY have a pattern similar or a little weaker than DOW or Russell? I guess are we "regime" changing? It does appear some of the correlations and flows are shifting a bit?
No it’s not a RBA vs BOJ thing, it’s an RBA AND BOJ thing. If I’m a carry trader, Im arbing yield spreads- borrow (short) low yielding currency (JPY at zero) and investing long at higher yielding currency (whatever is not zero, like AUD), so that’s a long AUDJPY carry trade position, and you get credited the yield spread every night (pro rated, since yields are annualized). But if that AU-JP yield spread contracts, I don’t get credited, I get debited from my account. The amount you get credited is next to nothing. Aussie 10y at 1.5% - JGBs at 0% for a 1.5% AU-JP yield spread divided by 365 days is like under a half basis point. So carry traders have to use leverage, which they do, some are levered up 200x or more, which is now looking more like collecting 1% per night. Carry traders also benefit from capital gains on being long AUDJPY appreciation itself, which is nice, but they ultimately really care about this so called “safe consistent daily income” - which exists only as long as the AU-JP yield spread stays as wide as where you went long (or wider). If yield spread narrows, you get debited, and it can narrow from either JGB yields rising or Aussie yields falling, or both. So yield volatility is not your friend- you want them nailed in place. Well well well, look what we have here come March 16th 2020, RBA announces YCC and joins BOJ as the only 2 cent banks on the planet to ”control the yield curve“ respectively. That means- go max levered long AUDJPY carry trade in as many diff accounts as possible, as 2 major central banks have killed both sides of yield volatility BY POLICY. And so they did. Now what to do with these daily gains? Well SPX & NKY is getting destroyed.. but don’t wanna catch a falling knife. (Enter central bank #3) - powell just said what? Fed sells massive put under all risk assets, unconditional, unlimited and forever? Think I now know what to do with carry trade proceeds. And of course there are algos but this is why AUDJPY and NKY and eminis trade in lock step intraday together.
And since boj has already nailed JGB yields down at zero even before the last 5 years they’ve been running YCC- this is why I’ve been saying, as of March’20 the most consequential central bank/banker to spx and global risk assets is Phillip Lowe & the Reserve Bank of Australia. Not the Fed ECB BOJ BOE etc - we know what the policy is- unlimited easing and keep telling us how serious they are about it, we get it. RBA just ventured into YCC land though, which is a highly under appreciated insane thing to happen- Australia was like the only CB left with room to cut rates further, yet they just dove head first into fixing their sovereign bond market - can they handle it is the question. Carry traders (and frankly all of us) did, and we didn’t think going into ‘21 that we’d be seeing ust 10s nearing 2% within like a month or 2. But that’s what happened- a global bond market sell off. that put RBA to the test as Aussie rates absolutely surge (AU10y basically doubles from 1% → near 2% in Feb) and they’re supposed to be capping/controlling the yield curve. So rba had a pretty intensely volatile fight with the bond market. Then completely seperately BOJ suddenly took the JGB yield cap off of their YCC. Bad for long AUDJPY carry trade. Very very bad- complete opposite of what the situation was following March’20. This is why the highs on Aussie yields in late Feb = the highs in NKY, and the then-highs in AUDJPY for a month or 2, carry trade & carry trade funded long risk unwind.
some old charts that i must’ve made a thousand times before
↑ What’s interesting is AUDJPY vs SPX as a ratio chart (bottom, blue line) - that ratio spread i made to see how AUDJPY is performing vs eminis (much like you’re looking at divergence now), and noticed that the ratio actually matched up well with the VIX.
This one below i remember well because I played the downside from early Sept thanks to Aussie rates giving me a heads up ↓
as for current, SX5E and Europe general as well as UK are on a new ATHs tear, which is what SPX has been doing. NKY is not only still not at its ATHs set in the 90s bubble burst, it’s not even at YTD highs. You can always find whatever specific reason for why NKY sucks at that moment in time, but the real answer is that NKY is the red headed stepchild. when NKY rallies, it’s a sign of short-mid term froth. Nobody buys NKY to over SPX to the point where it outperforms unless theyre already long everything else (including SPX) and nowhere left to go- and also therefore NKY gets hit hardest in downturns, last in / first out.
I actually think that right now, Europe has been “stealing“ some of the froth away from NKY. I also think NKY will have an outperform moment of a few months, in a few months, when Japan has its super delayed ”reopen” long after US/Europe reopens have been well priced in/over. But before that is tokyo Olympics later this month when Japan will be blamed for re-COVID-ing the world. watch Europe, US and Japan together (the big 3 DM). They never surge all together to new records, or just all do well simultaneously, flows get passed around. so if they do, thats when you should already be long crypto as that’s truly a fully saturated market with no alternative. right now is not a “no alternative“ market- Japan is an alternative. watch for nky if it starts to break out, and not at the expense of SX5E or DAX etc, and SPX is still making records, that’s when things are truly frothy. Japan is not participating yet - 1st half of ‘21, you know what the worst performing macro assets vs USD are? The lira obviously, then after that clowny asset, it’s JPY, gold, long dated treasuries, all -8%. Followed by GBTC. ishares country etf wise, EJW Japan is flat on the year worst performer
Very ! nice trading - the $AUD shorts, and the long SPX 3k - 4K calls.
Very helpfuly too to bring the NKY into the picture. Thanks man for the extra details. I read it all and find it awesome.
Crap ! Thanks for that explanation and those charts man!
I am going to spend some more time thinking through it more and will circle with you guys.
@Jeremiah S i gave you a shoutout on RVDB today for fhis very conversation
Haha yeah I just saw
thanks for the shoutout
hoping we can continue to get more people onto the exchange. I have a lot less short term value to add but I think a lot of the analysis im doing in crypto will eventually payout near the end of the year. Sometimes making high quality decisions just takes a lot more time.
I truly think you have limitless potential. don’t corner yourself into some self created artificial “speciality field,” you (specifically) can have multiple / unlimited areas of expertise - and you should be greedy with obtaining as much of that as you can (and as you already have been long before I knew you)
did I tell you that you also apparently are a real estate speculating wiz? Phoenix tops the list of highest home price appreciation nationwide YoY - nice long
@Matt Daniell In my club, I will splash the pot…. VVVENEEEVER ZA FACK I WANT
haha thanks. Just following the flows : )
Yeah I noticed the price appreciation in Pheonix when they raised my rent by 14% lol. This is not going to end well. Mortgage forbearance expiring this month and NPL are way above their 2008 peak.
What did the hivemind establish as the reason for the divergence in March?
Could it be as simple as USDJPY looks like it could trigger a CTA breakout?
My bias is Asia is slowing in line with the pandemic FIFO, not all Asia is the same mainly China and those directly linked to it either as a raw materials supplier (AUS) or as a services provider (HK).
If I have learnt anything this year trying to replicate the HE quads for Europe it is that the level of "equity" financialisation is nothing like in the US. The largest equivalent UCITS fund for EU Financials traded 11,000 shares yesterday compared to 42m for XLF. That says nothing about the underlying components I would have to look at, perhaps Europeans just don't like ETFs.
What you also have to account for is that the SP500 is the largest liquid equity hedge on the planet. Global equity funds are linked to it as a measure of beta and directly to it or the VIX establish vol parameters. That causes its own feedback "this market doesn't sense".
I wonder what the above chart would like against R2000?
Lastly look at a chart of the DAX over the same period. When SP NSDQ were throwing wobbles in Mar and Apr Europe hardly budged.
It is a good chart - the $AUD (AUDUSD) shows it as well.
It is purely (well - as I see it of course) the fact the USD is now the king pin. The USD is moving, and everyone else is collateral damage.
BUT - as Weston pointed out last week or the week before, the JPY is also moving with the USD. So - the AUDJPY or the USD is moving, the SPX not. The risk on risk off idea is not a factor here. It is a USD - commodities (expect crude oil) - inflation v deflation trade.
Plus - the end of month.
There could be a lag - someone else can theorise about the USD strength and the SP. Yet the first mover will be the inflation trade weaker USD beneficiaries (the $AUD) - the liquidity easier and the RBA not in a tightening mood.
Exchange Week Ahead w/ Petr
RVDB Afterhours w/ Weston & Jack
Going Through Charts w/ Petr
The Breakdown w/ Jack and Nick