A bit like 2018

Memories of Christmas Eve

This dislocation in markets feels similar to late 2018 when Powell made the communication error in October of that year (“We are a long way from neutral”) and then stocks plummeted into year end on poor liquidity. The nadir was Christmas Eve 2018 and the Fed quickly flipped dovish, telegraphed rate cuts, then started cutting rates in the Summer of 2019.

I suppose the question here is whether this is more like October 2018 or December 2018. My guess is that it’s more like December and we are already near a low. That correction was 20% and this one is only 10% so far, but I believe most of this correction has been driven by forced unwinds, not a terrifying change in the economic picture.

As such, I think we are now in a wide consolidation market that will eventually resolve back higher.  Sure, the AI narrative has peaked, and Trump’s odds (and thus turbo MMT odds) have come down significantly, but now Trump’s odds are stabilizing and so are the megatechs.

And these screenshots are what you see at the lows in USDJPY and cross/JPY, not the highs!   :]    We are just waiting on The Economist to publish “Carry Catastrophe” or “Yen Rising” (with a Japanese animé style phoenix image, LOL) or some such cover to complete the picture.

I do think the JPY can strengthen further in weeks and months to come, but first we need to consolidate. My base case is that we follow the December 2018 playbook. Lower yields, higher equities, and a rebound in USDJPY followed by a resumption of downtrend. Note that right after that equity selloff in December 2018, there was also a massive USDJPY unwind:

Looking at the current chart, I think that the 141.00 area will be the major base and that base will eventually be retested, To the topside, there is major resistance at 146.50 and then ubermegaresistance at 152.

With markets still running somewhat scared, seasonals still bearish, and volatility high… I like keeping an open mind here and playing the extremes. Consolidation time. Expect vol to trickle lower for a few days as things stabilize.

---

Final Thoughts

The CADCHF entry was decent yesterday and I have listed a take profit level in the sidebar. I want to get out before the big 0.6300 resistance (early 2024 support, broken). I will not be all that patient with this trade. I’m still nervous, just like you.

Have a spinny wheel free kinda day.

---

 

The Spectra FX Positioning and Momentum Report

Gnarly

 

Hi. Welcome to this week’s report. The FX vol showed up right on schedule again this year as the carry and debasement trades have all been rinsed and we are back to a clean slate for positioning in almost every currency, equity, metals, rates, and crypto book. This does not mean the bull market in equities needs to resume right away, but it does mean there is not much wood left to burn anymore. All the kindling is burnt, and all the logs are fully charred. Further directional movements will depend much more on new positions and macro data now, not more VAR shocks or position unwinds.

Three Observations

1. The JPY risky tells you just about all you need to know.

2. Yes, the JPY risky is gnarly. VIX is even gnarlier.

3. And much to the chagrin of the bears and forced liquidators… The NASDAQ could well close above the 200-day moving averages today. Bullish?

---

I live in New Canaan. Accurate headline!

good luck ⇅ be nimble