am/FX: Time Flies

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Talking about the USD and JPY, CNH and CAD.

by Brent Donnelly

September 15, 2022

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September 15, 2022

Time Flies

Today is both the 14-year anniversary of the fall of Lehman Brothers and the 1-year anniversary of am/FX at Spectra Markets! Exciting day for me. Thank you for all your support. Running this business has been a whirlwind and fun experience so far.

So much time has passed since 2008 and so much has changed it’s hard to even remember what things felt like back then let alone 1999 before the dotcom bubble burst, 9/11, the GFC, COVID, and the 2020 election. Amazing and scary how much things have changed in global geopolitics, the macroeconomy, and the social / human world. It was the best of times. It was the worst of times.

We have entered a period of consolidation here as the market absorbs Tuesday’s news that inflation is super sticky and there is no all clear on the Fed. It’s hard to argue for anything other than a continuation of the trend in the USD (and CHF) as the Fed and SNB seem to be the central banks that people most believe are serious about tightening. It’s kind of amazing how that whole “things are better in Ukraine” theme only lasted about 48 hours. And now Dutch NG is starting to perk up again, USDCNH is through 7.00 and the MOF is likely to be tested on USDJPY.

Speaking of the MOF… I was thinking about the RBNZ’s conditions for currency intervention because they apply to all central banks.

the exchange rate must be exceptionally high or low;
the exchange rate must be unjustified by economic fundamentals;
intervention must be consistent with the PTA (monetary policy);
conditions in markets must be opportune and allow intervention a reasonable chance of success.

Number three is key. You can’t be running ultraloose monetary policy and buying your own currency at the same time or you are just relieving yourself into the wind. And it still seems like Kuroda-san is keen on maintaining YCC until his departure in March or April of 2023.

As such, the 145.00 level in USDJPY is likely to be tested again if US rates keep going or even stay here. It becomes a cat and mouse game where you don’t really want to be involved in USDJPY spot because of random headline risk. Topside options are fine but your exit timing has to be golden. The BOJ meeting will attract a ton of attention and next week is going to be huge for CB action.

The PBoC is feeling the same pain as the MOF. All their super low CNY fixes only bought a week of breathing room and now the USD snapped back like a stepped-on rake and hit them in the face.

OER is weird

Meanwhile, the market is struggling with the fact that the rent component of CPI is super lagged, but the Fed is watching live spot CPI data as it sets policy. This thread on OER is excellent. Here’s house prices and OER. The lag is 8-18 months:

OER lags house prices

Outside of that, as Olgay points out, core CPI ex-shelter is still 0.5 MoM…so it IS widespread, but shelter looks high.

Final thought

USDCAD continues its slow march to 1.3500. It has formed a nice bull flag and is challenging horizontal resistance at 1.3215/25. I really like horizontal line breaks as a simple indicator. I like them so much; I wrote a whole piece about them here. https://50in50.substack.com/p/week-25-horizontal-lines