JPY XAG and more

Sell America 2

Still no actual intervention to speak of but USDJPY is crumbling under the weight of moral suasion from the US and Japan as the dollar is running lower after the Greenland tariffs and South Korea tariffs and so on have reminded foreigners that their capital is not necessarily 100% safe in the United States. Pension funds around the world now must wargame worst case scenarios. For example, a government-appointed panel tasked with advising Norway’s SWF said yesterday:

“The political risk to which the fund’s investments are exposed abroad is increasing,” the panel said, pointing out that the size and visibility of the fund further raises such risks. “The fund may ultimately be subject to increased taxation, regulatory intervention and even confiscation.”

The confiscation line sounds a tad inflammatory until you think about what happened to Russia and use your imagination to think through crazy endgames where the U.S. invades NATO territory as suggested  by the President of the United States a few times. It’s easy to say, “He is just bluffing to create a maximal position and it’s all just anchoring” and that’s probably true but if you are massively overweight USA to the tune of a trillion dollars… Do you want even a one delta of getting zeroed when the leader of a former ally goes rogue? We are firmly in wave 2 of the SELL AMERICA trade and this could last a while. You can see from USDKRW and USDCAD that Trump’s tariff threats are no longer taken seriously by the market, and/or the USD-negative impact is more important than the country-specific threat.

---

JPY

The argument authorities make on JPY is that it is not reflecting fundamentals. If you ignore fiscal policy (a big ask, I realize)… They are correct. The most glaring example is rate differentials, of course, chart here.

The booming Japanese current account also suggests that speculative outflows from Japan plus foreign yen selling are a big factor in the depreciation of the JPY. Please see the next chart. The ebbs and flows are nowhere close to simultaneous, and the causality often runs back and forth, both ways. A huge current account surplus eventually benefits the currency, but not right away.

These two divergences are well-known, but the point is: If that was the peak in USDJPY and the yen starts to mean revert from super-cheap levels… You can use your imagination as to where it might go. Especially in a world where capital wants out of the United States again. On January 20^th, I recommended buying 1-month EURJPY vol and so far that has been a good trade.

A few clients who did the trade have been asking me whether it’s time to take profit as the BOJ and the intervention story have passed but I don’t think so. Low and rising vol is something you want to own, and the endgame of this intervention story is still unknown. They haven’t even intervened yet! Furthermore, the 08FEB election is likely to trigger some confusing and potentially crazy vol. If Takaichi flops, the JPY will rip. If she doesn’t, the market will tentatively sell JPY and then wait for the visible fist of government to slam USDJPY. Either way, it should be volatile. And for context… EURJPY vol is still low even as it’s ripped from 8 to 9!

---

Silver

A few people have asked me whether there is a relationship between precious metals and the dollar these days, and my instinct was to say “no” because there have been plenty of times when precious rallied and so did the dollar. The data tells a different story, however. Here is weekly data showing the P&L of various assets in weeks where silver is up or down. If you use weekly data, you smooth out a lot of noise.

You can see that the performances of EURUSD and USDCHF are still in synch with silver, pretty much. The S&P and bitcoin, not so much. Silver up seems to be reliably consistent with S&P 500 up, but if silver is down, S&P performance is pretty much random ex-2020. Bitcoin mildly prefers higher silver, but it’s dominated by two big moves in 2017 and 2021. Outside of those two mega bull runs for bitcoin, the relationship is close to random.

If you run the charts using gold, they look virtually identical.

---

Final Thoughts

1. The AUD call idea from Friday afternoon’s very rare pm/FX is working so far as we gapped higher on the Sunday open and have held the gap. Tonight’s CPI is crucial as it will help determine whether or not the RBA is ready to hike right away. Note (as shown yesterday)… 0.6942 was the 2024 high in AUDUSD and it’s a big level to watch.
2. The FOMC is tomorrow. It hasn’t received that much attention, but I suppose there is some room for them to sound hawkish. At this point, I would think that the market will simply fade any rally in the USD because we are in the early days of a strong new narrative and Powell is a lame duck at this point. The base case should be the meeting is a nothingburger as a robust labor market and falling inflation put the Fed in a nice spot.

Cool graphic from Bloomberg:

3. Bank of Canada tomorrow. Stable but weak economy + a zillion rate cuts with long and variable lags = on hold for the foreseeable future. For what it’s worth, every cycle where Canadian home prices have gone negative, Canada has experienced a recession. See chart.

4. Trump has finally met some opposition. Canada and Europe and Minnesota all taking a stand. Does it matter for his future policy approach and desire to bandy tariffs about? I doubt it, but it’s a question worth asking.

Have an entrepreneurial day.

Two twelve-year-old kids rang my doorbell yesterday and asked to shovel my driveway for cash and my faith in America’s future has been instantly restored.

Took them three hours and they did an amazing job!

good luck ⇅ be nimble