Weston Nakamura Visionary5,296 Japan & US Global Macro Markets
NYC born and raised, currently based in Tokyo.
Former hedge fund equity sales at Jefferies and listed derivatives trading at Goldman Sachs Japan.
Current independent options investor/trader on single stocks/ETFs, index vol, rates derivatives, FX vol, commodities vol. Core long crypto holder, active long/short crypto trading & BTC options.
Founder of Across The Spread- covering global macro markets with focus on US & Japan, monetary & fiscal policy, geopolitical risk analysis for institutional buy side + individual investors. Aim to provide ONLY differentiated, non-consensus market views, observations, noise filtering and trade ideas. Active on Twitter @acrossthespread, charts featured on TradingView @acrossthespread, and website acrossthespread.com
Other work with economic policy committees, fintech/digital payments space.
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MASSIVE lira move stronger on kneejerk algo move now stabilizing. Would be very very interesting if lira ends up trading WEAKER on the week despite rate hike- as then they’d have zero tools to stop the lira bleeding.
Gold & silver seem relatively unfazed, BTC moves ↑ counter trend
Will be a very interesting day-week for gold silver & crypto
🇹🇷 CBRT Rate Policy tomorrow (Thurs)
Rumors of an official policy rate hike getting louder (my view- rate hike extremely unlikely/simply not happening). Nonetheless creating tug of war and volatility on non fiat assets- those who believe in coming CBRT tightening measures are selling (what they believe as) the top on crypto, silver, gold at EURTRY 9 ceiling.
Charts below of EURTRY vs ETHUSD to keep in mind
1) ETH clearly oversold in context with decoupled EURTRY drifting ever higher.
2) Last time EURTRY broke through round figure > 8:
•EURTRY & ETH positive correlation breaks down and turns inverse correlation as EURTRY approaches 8 (similar behavior to current approaching 9) as battle between “resistance holds” vs “break through” creates non-fiat asset volatility.
•Capitulation happens VERY quickly as it becomes apparent that lira won’t hold round levels, two-sided trade battle ceases, & crypto decisively frontruns the directional move.
•As EURTRY breaks through 8 handle:
ETH +30% in 2-3 days, +60% in 2 weeks & doubles in 5 weeks
Another thing interesting I’ve noticed:
AUDJPY/ES1 ratio (AUDJPY/Eminis - essentially pitting AUDJPY against SPX Eminis out/underperform vs each other). This AUDJPY/Eminis ratio trades strikingly similar to the VIX.
So in early June, when i saw AUDJPY start to decouple and pull away higher from Eminis (though directionally the same upwards), figured either SPX will have to catch up with a delayed boost in momentum (and therefore sell ATM SPX puts to fund 30 delta short dated SPX upside calls), OR, AUDJPY got ahead of itself and will pull back, which will then cause a pull back in SPX (and therefore buy SPX downside puts). 2 directionally opposite trades, in went with the puts. Why/how to determine which one was going to correct to the other? Because of the chart below that i used at the time.
AUDJPY/Eminis ratio was trending higher, and since VIX trades in line with this ratio, that meant VIX was heading higher → SPX lower.
Immediately following this chart, AUDJPY tops first (as it does), pulls back 6%, followed by SPX on an approx 24hr delay pulling back 8%.
So- keep an eye on AUDJPY/Eminis ratio vs VIX as well as obviously AUD and Aussie rates/RBA (the central bank of risk assets, not the fed or ecb or boj)
Original post ↓
SPX RISK OFF RED FLAG: Australia Rates, AUD
•Australia front end rates get crushed, AU 3y yields at all time record lows off RBA Deputy Gov Debelle’s comments “neg yields are possible.”
•AUDJPY already on a continued downtrend, having topped in early Sept & down -2.5% this week.
Why you (risk asset/SPX investor) should care:
•Since March sell off, I have been more than annoyingly repetitive about the dominating impact of AUDJPY driving risk-on (including/especially on SPX rally), as this factor is completely overlooked to this day.
•AUDJPY correlation with SPX (via emini futures to match round the clock FX trading hours) has been tighter than SPX vs any other major cross asset class: from a March - current chart or an intraday tick for tick, AUDJPY & eminis are locked in with one another.
•Why the correlation? Because of the AUDJPY carry trade, from which proceeds are funding risk assets.
(FX Carry trade: borrowing/selling in a low yielding currency, to fund/buy a higher yielding currency, yield differential positive/negative gets credited to your account daily. Carry traders use margin, some 50x~200x, to boost spread returns. In addition, capital gains/losses can be realized as the currency pair itself moves higher/lower. AUDJPY carry can get huge- it was THE go-to FX carry pair that funded a lot of the long subprime trade leading up to ‘07-‘08 crisis, & subprime implosion caused a vicious long AUDJPY carry trade unwind that crushed AUD -35% in 3 months & strengthened JPY from 125 → 75.)
•So why is the AUDJPY carry being put on, if Aussie-JGB yield spreads are thinner than ever with RBA (Reserve Bank of Australia) having slashed rates to record lows even pre-COVID?
My view: Yield Curve Control
With BOJ keeping JGB yields at zero for 2 decades, Aussie-JGB yield spread used to offer ~4% diff for a great carry return. But that spread has been squeezed as RBA slashed rates. However, the carry reward is only one side of the risk/reward- the risk factor is yield volatility (if you’re short JPY vs long AUD on 200x leverage, and yield spread narrows either via JGB yields ↑, AUD yields ↓ or both, your account gets debited every day that happens- what you want is yield stability to collect the spread).
•Sept ‘16: BOJ first major CB to implement YCC, pinning 10y JGBs at ~0% (front end JGB yields neg). For carry traders, this is unprecedented opportunity- BOJ by official policy is keeping the JPY half of the 2 legs in a currency pair fixed, thereby reducing yield volatility risk by half overnight. One week following BOJ YCC rollout, open interest and trading volumes for iron ore futures on SGX exploded >10x, funded by AUDJPY carry being put on in size.
•As RBA cut rates in ‘19 to record lows, AUDJPY carry trade was taken off.
*RISK GAME CHANGER*
March 19 2020: RBA JOINS BOJ IN BECOMING SECOND (of 2) MAJOR CB TO IMPLEMENT YCC (targeting front end rates: 3yr AU yields)
•NOW, BOTH AUD & JPY yields have volatility risk effectively wiped out (or perceived to be), leaving AUDJPY carry trade essentially “vol risk free”, as per mandate by official central bank policy from BOJ & RBA. Thin AU-JP yield spreads FAR outweighed by perceived risk elimination if both yields are hammered down & stable: AUDJPY carry trade put on with max leverage for “guaranteed” daily account credit, proceeds used to fund long risk assets (US tech). And since BOJ has been unchanged in rate policy since Sept’16 YCC, the RBA/AUD has been the variable central bank, economy and currency to impact world risk assets far more than realized.
AUDJPY bottomed and reverse rallies on RBA YCC days before SPX did in March for AUDJPY driven risk on. AUDJPY rolling over has also reliably led SPX mini downside episodes by 24~36 hours. The AUDJPY → SPX upside since RBA March YCC explains a lot:
•”SPX & economy don’t reflect each other!” ← yeah, no shit. Since when was SPX = economy? SPX doesn’t even reflect the S&P500, it reflects the structural passive fund premium on 5 tech tickers. If you just look at what actually drives what from an actual capital flows perspective (vs theoretical “should/shouldn’t be’s”), SPX relentless rally makes complete sense, since driven in large part by AUDJPY carry.
•AUD / AUDJPY carry doesn’t care about US macro data deterioration, SPX earnings, COVID numbers, US social unrest etc, even no further stimulus agreement from useless Congress. Which is why SPX doesn’t care about any of those things either
How the Fed fits in:
•Following each FOMC meeting since June, SPX pulls back- despite no shock/change/anything different out of FOMC or Powell press conference coming out. And even if there were (via “perceptions/expectations” of what more from unlimited, idk), markets just return to rallying shortly thereafter anyway. So it’s nothing Fed related (blasphemy I know).
So why does the post FOMC pullback happen?
AUD carry trade.
From June, market narrative has been expectations of US to become the next to adopt YCC. Should that happen, you’d now have three fx pairs to carry trade with fixed yields: AUDJPY, AUDUSD, and to lesser extent USDJPY. 3 options vs current 1. AUD gets bid up in anticipation (and temporarily detaches/outperforms SPX).
But then, each FOMC has not produced anything concrete on US YCC. Powell barely addresses it. Fed YCC premium comes out of AUD ↓, which then pulls SPX ↓. While pundits manufacture reasons of “Powell’s tone” or whatever other intangible clueless guessing nonsense.
This happened in June, July and Sept FOMC. But with sept FOMC, equity markets already on a downturn.
The Sept NDX sell off explained:
•First of all, just a general point: anytime theres a major market move and consensus explanations are generalities (“valuations got too ridiculous,” “COVID concerns,” “Congress not doing anything”) and the rest of the things that markets have ignored - ask them/yourself: ok, but WHY NOW? And you’ll get silence or more nonsense. WHY NOW matters, because if you can’t answer that, then it’s likely not the driver. World market participants don’t wake up one day and simultaneously decide “today shall be the day in which Nasdaq P/E is too high and we shall all collectively sell.” That said, consensus stupidity is useful info- if this is what’s echoed, it signals market participants have no idea what’s really going on, and/or are following false signals, which you can use to your advantage.
Why US equities rallied Tues-Wed Sept 1 & 2, then got crushed Thurs-Fri Sept 3 & 4 (and thereafter):
* 9/1: Australia surprise posts largest account surplus ever at AUD 17.7bn, revised up from 9bn and expectations of 13bn → AUD positive → SPX positive, US equities get a boost.
* 9/2: Australia enters first recession in 3 decades. Recession was expected, but GDP comes in at record sharp contraction -7%, far worse than -5% expectations. For an economy that sidestepped recession even during 2008 to have a worse than expected, first/sharpest contraction that basically all market participants active today have never seen in their careers, this is AUD negative: AUDJPY falls → SPX follows.
(Another explanation for that specific Thursday sell off “what changed” - literally the date: 9/2 → 9/3. There are many systematic risk systems look at 1 month implied vol to add/de-risk. But many also react to 2 month implied vol. US elections, the consensus perceived biggest risk event for rest of 2020, is on 11/3. So when the date literally switched from 9/2 → 9/3, 2 month implied vol now captures 11/3 major risk event overnight, systematics de-risk, VIX pushed north of 30). AUDJPY has not reversed its downside since its GDP print as of this writing, and SPX has not made new highs either.
RBA coming out talking Aussie policy rates neg possible just crushed the front end of the Aussie YC to record lows, AUD declines. AUDJPY yield spread just got crushed. Expect risk assets to follow.
*BTW- Tony Greer has been keeping eyes on AUD as well but more from a fundamental/actual real world trade & commodity demand perspective. Real world FX flows/settlements matter for sure. But as per a prev RV interview Raoul Pal had conducted a while back- for the first stretch of post March rally, global trade had come to a standstill, as did FX commercial transactions. Meaning, financial flows (like carry trading funding financial risk assets) had even more direct impact. Roger Hirst has also been on top of watching AUD as well.
Potential contagion risk to EU banks, BBVA with highest exposure in addition to EU banks mess today Raoul Pal
**EYES ON 🇹🇷CBRT Meeting Thurs**
Is there a way to be able to create a post or even a question with template B capabilities? Particularly with posting a thesis or summary with multiple charts, you would want to have the corresponding chart and text in succession rather than just a block of text and a cluster of photos at the end to try to go back and reference.
Also- “trade ideas” - is that gone now?
Finally, it would be further helpful if we can reply to comments also with a pic attachment feature vs just text- on a few occasions I needed to reference a particular chart in my response but as unable to do anything besides text in response, I had to create an entirely new post just to be able to make the necessary attachments and respond (which then I assume gets posted as a new post when it’s just a part of an ongoing existing thread).
Thank you very much!
The following chart actually has nothing to do with neither GE cash flow guidance nor the Fed (despite both happening yesterday), but something i noticed some time ago- one can analyze GE’s issues with spinoffs and balance sheet all we want but if you look at the long term trend, GE story seems pretty simple and straight forward:
• GE shares move ↑ exactly in lockstep w/ SPX index during easy monetary conditions/rates at zero (free to lever up → lever up).
• GE tops and starts diverging ↓ vs SPX when talks of rate hikes begin (free money days coming to an end, debt servicing costs rising begins).
• Dec ‘15: rates lifted off zero bound but “dovishly” so (seen as one-off vs start of hike cycle). GE shares trade on massive volume ↑ on FOMC
• 2017 - 2019: Fed Funds rate hike cycle → GE falls -80% as SPX rises +30% for 110% performance spread. GE bottoms when Fed pauses hiking
GE shares have been a pretty straight forward Fed/macro play. In the long term, shares trade according to their cost/ability to service their debt load. GE one of the major credit risk names Raoul Pal had been flagging.