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Peak Reflation?

Significant-looking tops in commodities may signal that we are near or past the peak in the inflation reacceleration narrative—and US yields.

April 23, 2024

“What time is BOJ?”

Details at bottom of page

Current Views

Short EURJPY @ 164.10

Stop loss 165.76

Take profit 160.16

Rates

There has been a huge repricing in rates on the back of strong US data, the rebound in global manufacturing, generally strong global data, zippy moves in Japanese yields, and perhaps most importantly: A huge resurgence in commodities inflation.

Now, commodities have lost their topside momentum, oil is trading at a one-month low despite Israel and Iran attacking each other directly and lumber is cratering. Back in the Lehman Brothers days, we used to watch lumber as a lead indicator for housing and most recent US housing data has looked soft.

You can see in this first chart that the big turns in oil (March 2023 low, June 2023 low, September 2023 high) all coincided with turns in yields shortly after. Obviously, there is some hindsight bias because we don’t know yet if this is a major turn lower in oil, but the price action around the conflagration in the Middle East makes me think we retest the bottom of oil’s range $68/$70. This should put downward pressure on yields and cross/yen.

I suppose Yellen will have something to say about yields at the QRA, too, and I would always bet on dovish Yellen, not hawkish.

While I am bearish USD because of my view that yields are topping out here as inflation fears subside (while USD longs remain extreme and policymakers chirp “no mas”)… The timing remains suboptimal with corporate and real money month end buyers both likely to need USD over the next few days.

Corporate month end is this Friday and real money month end is next Tuesday. I continue to look for the right timing to get short USD, but it could be that I wait ‘til next week. Note that yields are so far respecting the 4.70% level. That was the last spike high on November 13, 2023, the day before weak CPI topped us out.

September 2022

DJ Shady pointed out something I had forgotten. The MOF intervention in September 2022 came less than six hours after the dovish BOJ meeting. Given the lineup of white-knuckled policymakers staring at USDJPY, that makes this week’s BOJ particularly interesting.

The dream scenario for intervention-wanters would be USDJPY is 155.50 going into BOJ, it prints 156.24 after and then it’s 150.00 given as the MOF inserts $50B. That doesn’t seem far-fetched to me. The not-dream scenario is USDJPY sits here doing nothing. I have been on the edge of my seat for about 10 days here, but my belief remains that you just don’t get this much smoke without some fire. That said, USDJPY trading back and forth in a 30-pip range isn’t going to bring out the MOF lightning bolts.

Low realized vol, short carry, and expensive skew make this a tricky one. But trading is always tricky, I guess.

For the record, the MOF intervention in October 2022 came five days before BOJ and started at 10:30 a.m.

Seriously, though. What time is BOJ?

The hoodie is good for a laugh, but here are the actual times that the BOJ released its decision (2016 to now). The bars are arranged in order from oldest (left) to most recent (right), starting with the January 28, 2016 meeting. The chart is kind of insane, but FYI the average is 22:47 and the median is 22:51.

Note the times past midnight have bars that only go to 24:00 due to charting challenges

If you log on to Bloomberg at 9:30 p.m. NY time Thursday, and stay glued to it for 3 hours, you’re probably good. Exciting times.

Final Thoughts

I am not a Taylor Swift fan, but I will give any record or genre a shot. After listening to the new albums, they are mostly a pass for me, but “Down Bad” is an excellent pop song (contains bad words). As a Post Malone fan, I found Fortnight disappointing. It starts slow and builds to nothing very spectacular.

Have a Spectracular day.

The Spectra FX Positioning and Momentum Report

GBP: Rinsed Again

Hi. Welcome to this week’s report. The USD has been rangebound over the past week as extreme long USD positioning and risk aversion from the tech selloff have been offset by sticky and high yields in the US. The battle rages on. Positioning remains extreme long USD again this week, while the GBP longs are just about fully cleaned out by dovish Bank of England communications.

Three Quick Observations

Those bizarre GBP longs that were added by the CFTC in a time where there was no momentum or carry trade to speak of have once again been wiped out. GBP positioning has been an excellent reverse indicator for cable over the past two years and this extreme long touched recently was no exception. With Pill refusing to ratify the recent dovish outlook and the CFTC close to flat, the bearish GBP trade could be done for a while.

AUD momentum has flipped. This is worth watching as the hourly chart looks like a blowoff bottom and the CFTC and options markets continue to suggest heavy shorts.
The extreme long USD position is important, and I believe it skews the distribution of probabilities for the dollar over the next month or so. That said, there is corporate month end and real money month end to contend with here, and both are likely to be USD bullish. You can’t just go short USD because of positioning. You need more planets to come in line first.