Article / 22 September 2016 at 6:15 GMT

The Matrix: Reflections of a strategist the day after BoJ, Fed, RBNZ

Global Macro Strategist [Asia based] / Saxo Bank
  • Expect an inflection point in USD liquidation/continued weakness 
  • Expect new highs in Kiwi, Aussie and other high-yield currencies
  • The BoJ introduced new measures but it wasn't game-changing
  • We’ve touched ¥100.10 for the USDJPY and it's still early days
  • I expect we will very shortly break 100 and enter a new trading range
  • The Fed keeps moving the goal posts but the game never progresses

By Kay Van-Petersen

Key take-aways

  • Inflection point in USD liquidation/continued weakness over an extended period, given the next "real" Fed meeting is 83 days away on December 16 and the event risks between now and then are huge (Trump in the US, Italy in the Eurozone, and these are known unknowns).
  • Expect us to break out of the range trading environments that we’ve been stuck in for months, i.e. across currencies, commodities and equities.  
  • It will be risk-on and that’s the pain trade, given the levels of cash on the sidelines and the fact that everyone has been waiting for the shoe to drop for the last few years.   
  • We will make new highs on Kiwi, Aussie and other high-yield currencies vs. the USD. I expect equities to melt up – especially the US, as will commodities. 
  • Key risk to this USD liquidation/ multi-asset range-bound breaking thesis is if we start to once again make new highs in G3 bond yields (lower lows in bond prices). In such a case, what took equities up (lower and lower yields) will unravel equities and lead to risk-off. I don’t expect it to happen – but it definitely bears watching. 

Bank of Japan

Bottom line, they did the worst possible thing, introduced new measures – were immediately rewarded – but once again not to the level or extent that was game-changing by any means. Almost seemed like a freebie to the financial sector. 

This is the third consecutive disappointment from the BoJ (post Jan 29 and Jul 29) and the market will show its displeasure over the next few days/weeks. 

If you were on my bloomie chat, or we spoke and/or you saw my video yesterday, you would have gotten my take on the BoJ and subsequent price action – it's played out beautifully so far. Earlier in the week on CNBC I was tweeting how at 102 dollars the yen was outrageous.

USDJPY chart
 Source: Bloomberg

As of this morning we’ve touched 100.10 and it's still early days. Key now is to obviously get a close sub 100.00 and if we get that on a Friday then its bye-bye for now.

 How many drum kits does it take to get USDJPY under ¥100? Plenty. Photo: iStock

I’ve been banging the drums on this for a while – five broken drum sets and multiple burnt drum sticks later, it plays out. So this will be the last big ringing of the bell, we will break to new lows and take out the 99.00 level that we hit on Brexit Friday .

What’s next? I expect we will very shortly break ¥100 and enter a new trading range for USDJPY, where ¥90-¥100 will be the new corridor. Japan gets back in tomorrow and equities should rightfully be in for a hosing.

Note the curve focus makes things easier for financials and life insurers but it’s not a game changer by any means, they are still gonna feel pain .

Next BoJ meeting is November 1, 40 days away. A lifetime in a tactical near-term market.

To quote Bill Gross (Janus Capital, ex. PIMCO) post the Fed decision.:
“I'm choked with emotion and hardly able to speak…” They've flattened the curve because now bond markets expect a lower long-term fed fund rate and therefore long-term yields will flatten relative to short-term yields…” “It's very confusing especially relative to what the Bank of Japan did last night”
This from one of the best all-time multi-decade bond investors – if he’s struggling to make sense of the Fed, what chance do most people have?

I stand by what I have said before, the last people to know what the Fed will do are the Fed themselves. Why? Because if you keep moving the goal posts, the game never progresses. Do you know when is the right time to raise rates? I’ll give you a clue, it’s the same as the right time to cut rates. There is never a right time, so data dependent/pending comments are simply an indecisive Fed.

They could have been a lot more hawkish if they wanted to. With that said, all the new language was constructive and definitely not dovish, including the potent addition:
“The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.”
Next “real” Fed meeting is December 16, 83 days away – that’s light years away in these markets.

I think we are entering what is going to be the longest USD weak/liquidation regime so far this year – which could be fantastic from a trending perspective, with a lot of currencies, commodities, equities and corporate credits breaking out of trading ranges that have held for most of the year.

Key caveat here, is that yields have to hold – they need not get tighter – if we start making higher lows in G3 yields (lower lows in bond prices) then we could end up having quite a few more hiccups like the Friday Sep 9 sell-off, VIX up 40%, S&P down 2.5% etc. It's no coincidence that that came post-ECB temporary pass on further QE.

Remaining Fed meetings are: November 2 and December 14 (with November 2 seen as a washout, given US presidential elections will be held that month)

Reserve Bank of New Zealand

All systems go on Kiwi longs … last 0.7332 down 0.24% on the day post RBNZ this morning .

With an economy annualising up 3.6%, housing supply needed in Auckland, diary prices firming up, a rebounding China, on top of an RBNZ governor who believes (rightly so) that further cuts will not sustainably weaken the currency (i.e. relative to the world, RBNZ at 2.0% vs. say ECB at -0.40% is a no-brainer) .

Kiwi is leading the way breaking out and I believe we will keep trending to the upside, making newer highs. 0.7360 is the key top side level after which it should be smooth sailing past 0.74 cents and upwards. Watch out for Aussie, which will trail this move up, once we get to the other side of the RBA (Oct 4, market not expecting any cuts) there will be more tail winds.

Structural Kiwi | Aussie longs vs. great funding currencies such as SGD should be considered, as these could play out beautifully for quite a few quarters to come – lot of shelf life trading themes here. Higher yielding FX such as INR and RUB will also join the party … as will other commodity names, because commodities will also be breaking out, expect new highs in gold/silver and more importantly on the miners, which should start to see some increasable increases to the bottom line

Next RBNZ meeting is November 10, 49 days away. Yep you guessed it, years away in these markets.

– Edited by Susan McDonald

Kay Van-Petersen (KVP) is Asia Macro Strategist at Saxo Bank, please follow him on twitter @KVP_Macro and at SaxoStrats. Don't forget Macro Monday – your weekly cross-asset Global Markets Call. Please join us here live again next Monday at: 0830 [SG/HK], 0930 [TOK], 1030 [SYD]

22 September
AlexF AlexF
Hi Kay clear call you made. Now which pair would you favor to take advatange of USD liquiditation on 2-4 month view (not day trading). NZD,AUD,EUR,CAD ?thanks for that
22 September
Market Predator Market Predator
I believe, this is super important: "They've flattened the curve because now bond markets expect a lower long-term fed fund rate and therefore long-term yields will flatten relative to short-term yields"
Very nice summary, thanks Kay!
22 September
ChristianK ChristianK
How about going long NZD vs. JPY? Thx
23 September
Kay Van-Petersen Kay Van-Petersen
Hey Folks: AlexF like your thinking, I think 2-4month view.. I would be thinking of funding crosses such a SGD, CHF on the short side vs. being long crosses such NZD, AUD & even some of the EM FX with high yield should do well - IF my thesis plays out. So I like INR, IDR, RUB on the long-sdie... for the first two we do NDFs on them.
23 September
Kay Van-Petersen Kay Van-Petersen
Market Predator, thx for the post & flag as well as the previous one bangind the drums for the Macro Monday call! :) A lot of love, work, sweat, blood & tears goes into that. We'll obviously get a lot of things wrong, quite a few things right but objective over time is to get the really big calls right & get better in the process of looking at these markets. Always something to learn everyday in this game. So please keep spreading the word, join us live on or get the replay when it goes up on
23 September
Kay Van-Petersen Kay Van-Petersen
ChristianK I personally would not be shorting the JPY in the near-term, as per my piece above. I think the yen strengthens & we break down into a 90-100 DollarYen move... before we potentially go back to a stronger yen (again Fed, BoJ dependent... but thats more a 2017 scenario... near term... its yen strength)... So I would look at either Kiwi Longs (big sell-off today, we are hearing macro guys unwinding AussieKiwi shorts... thinking RBNZ more dovish than RBA... I am not so sure about that being right) vs. USD, CHF, SGD, EUR... etc... I don't get people play AUDNZD cross (unless your playing a squeeze one way or another), because to me, why would you race two champions against one another, when you can pick much worse candidates for the short leg.
23 September
Kay Van-Petersen Kay Van-Petersen
Hope that thinking helps folks. Let me wish you all & yoru families a brilliant wkd ahead. TGIF!


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