Maybe this bullish JPY trade is real?
highlights
JPY NFP
Current Views
Sell EURJPY 183.09 and 183.39 (50% each) limit orders through NFP
Stop loss 184.61
Maybe turn it into a 1-month 180.00 EURJPY put if I get done up there
Yen
I am going to keep it quick today so I can publish well before NFP. First of all, I think I whiffed on the bullish yen trade yesterday. Upon further review, it looks to me like the bullish JPY trade could be logical and have legs. The risk is that I am getting sucked in by the price action but two nights in a row you have aggressive JPY buying from Japan names and we are breaking down through the cloud in many cross/JPY pairs. For example, look at EURJPY. We have mostly been above the cloud since Liberation Day. We have been above for 20 big figures (!) and a close below 183.00 today puts us inside the cloud and beckons the bottom in short order (180.00).
The bullish JPY narrative is:
- Takaichi in control for four years. Policy is now a known. There is no uncertainty on what it’s going to look like. The right tail in USDJPY (weaker JPY) is now cut off, especially with the rate check signalling that 160.00 is the do-not-pass line. Now, the tail risk in JPY is on the left (lower USDJPY) as the market will fantasize about a return to fair value as denoted by rate differentials.
- Minority parties that want more fiscal in Japan have no say.
- Market still modestly short JPY.
- JGBs have stabilized / bottomed.
The March BOJ meeting and all BOJ speeches are important.
Long EURJPY and CHFJPY have been two of the highest Sharpe trades in macro (not just FX) for the past year. High Sharpes attract a ton of money from trend followers, momentum chasers, and humans. They often unwind faster than they built up.
Here’s the rolling Sharpe of EURJPY back to 2000.
Having missed a massive two-day move already, I will look to sell rallies in USDJPY and/or EURJPY soon. NFP might offer an opportunity to sell a random EURJPY rally above 183.00. I will leave offers at 183.09 and 183.39 through jobs. Stop loss 184.61. Details in sidebar.
NFP
Nonfarm payrolls today. Grid below of how I will interpret various outcomes. I think headline tells you the demand story and the Unemployment Rate tells you the supply story. Both are important. If they are in conflict (weak headline, low UR) it’s not a clear trade. If they agree (weak headline, high UR), it is. Here are my guesstimates for bond and USDJPY reaction to jobs.
Final Thought
AI and our economic future (NBER).
Artificial intelligence (A.I.) will likely be the most important technology we have ever developed. Technologies such as electricity, semiconductors, and the internet have been transformative, reshaping economic activity and dramatically increasing living standards throughout the world. In some sense, artificial intelligence is simply the latest of these general purpose technologies and at a minimum should continue the economic transformation that has been ongoing for the past century. However, the case can certainly be made that this time is different. Automating intelligence itself arguably has broader effects than electricity or semiconductors. What if machines—A.I. for cognitive tasks and A.I. plus advanced robots for physical tasks—can perform every task a human can do but more cheaply? What does economics have to say about this possibility, and what might our economic future look like?
Have a lightning-hot day.
