Blowoff Bottom in USD/¥

July 14, 2023

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¥

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The BOJ are playing a very long game as they announced last night that they will hold workshops for a long-term policy review in December 2023 and May 2024. These workshops are separate from the BOJ monthly decisions on YCC and interest rates but given the workshops focus on monetary policy, financial system and market developments, and impacts of easing, anyone looking for a July move in YCC has to be a tad unnerved by the idea of a 10-month timeline for these workshops.

It certainly doesn’t show any sense of urgency at the BOJ! Then again, they already changed policy in December 2022, so obviously these workshops don’t need to happen before a policy change.

While it does seem like a lot is now priced in for the July 28 BOJ meeting, vols are about where they were going into past BOJ dates as you can see here. This chart shows 2-week yen vol minus 1-week yen vol and the spikes are the day that the BOJ meeting was within two weeks and thus captured by the 2-week vol but not the 1-week.

As a logic check, I also made a chart of the 25-delta risk reversal simply because Bloomberg vol data is good but not perfect. The risk reversal tells the same story. Options markets are excited, but not THAT excited.

And here’s a chart of JGBs. You can see the disappointment around the last two BOJ meetings as Japanese fixed income put in major lows both times.

Japan JGB future, late February 2023 to now

USDJPY looks like a blowoff bottom overnight as we took out all four supports (137.80/138.00/138.30/138.50) and have now zoomed back above. My bet is that with downside momentum now broken, the BOJ meeting well-priced, US yields stable, data out of the way, and BOJ and FOMC still about two weeks away… We consolidate 138/141 now. Next week looks a bit boring on the US data front with Retail Sales the only real excitement but there is plenty to chew on elsewhere with Canadian, NZ and UK inflation all out.

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 New head of the RBA

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Michele Bullock is the new governor of the RBA. This Bloomberg article is a good explainer of what it might mean for policy direction. Short answer: Not much. The implications are certainly not dramatic as she is the ultimate insider, having been at the RBA for the past 38 years (!). She’s 60 and started there at age 22. The only real change here is that the RBA is moving from 11 meetings per year to 8, but that has nothing to do with Bullock.

Here’s a quick excerpt from that Bloomberg article:

Diana Mousina, deputy chief economist at AMP Capital Markets says:

“From some of her speeches over the past year I have taken out that she is probably a little bit more concerned than Philip Lowe was around the lags involved with monetary policy,” Mousina said.

“I also get the sense that she is a little bit more attuned to the risks to the household sector, specially in Australia where households are much more sensitive to interest rate changes compared to a lot of other countries.”

At the margin, sure. But don’t’ expect the RBA to feel much different under Bullock. The primary issues (high inflation, fragile household sector) are the same.

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Final Thoughts

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Keeping it short today as it feels like a quiet one. While the rebound in USDJPY looks meaningful, the technical damage to the dollar overall is unchanged as the DXY and EURUSD and GBPUSD and USDCHF are all completely broken still. Here’s the DXY. Note the two beautiful clean breaks in the 200-day, one in July 2021 and more recently in December 2022. DXY above 101 or EURUSD below 1.1080 would cause significant damage to the technical picture so keep an eye on those levels if we start to lose USD down momentum.

Have a G Wagon kind of day.

good luck ⇅ be nimble

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1.  

Wow. by Post Malone

 

2. 

Fake Plastic Trees by Radiohead

 

3. 

Boys of Summer by Don Henley

 

 

4. 

Bullet with Butterfly Wings by Smashing Pumpkins

(the world is a vampire)

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