Archive - Oct 31, 2011

We ended last week with 88%+ of USDJPY traders long and wrong for many months now. Today Japan sold the yen for the second time in less than three months after it hit another all time high against the dollar last week.  As usual...retail traders are quickly moving position and we are seeing a strong drop in overall long positions to 70.83%. We expect this trend to continue but its important to note that past interventions haven't done a whole lot to stem the tide.

The Q3 GDP report tells us nothing about the health of the economy and it is misleading at best.

With tonight's multi-year record CNY fixing and trillions being flushed at maintaining an arbitrary JPY line in the sand, it seems appropriate to re-consider how to hedge a China hard landing and what probabilities various asset classes are assigning to it occurring. While many are pointing to what seems an entirely capricious level of 79.20 JPY to the USD as the 'new normal' being defended, we were curious at the strange coincidence that the CNYJPY cross implied by tonight's CNY fixing and the 79.2 JPY was exactly the average CNYJPY level during the QE2 period. It seems the Japanese are hedging their tail-risk against the Chinese and a recent note by Morgan Stanley points to how various asset class traders might consider hedging their own version of a hard-landing scenario and notably they agree with us that China sovereign CDS remains among the 'best' hedge.

And with that we can put the highly semantic debate over which direction the European currency opened pre-market to rest. To all who were caught wrong way for the past 160 pips, better luck during the next centrally planned intervention. The next catalyst will be BTPs opening for trading in a few brief hours. We are very curious whether the ECB will more focused on preserving the Italian stability falacy or the EURUSD overvaluation myth: perhaps both? After all, "there is a (completely unfunded) EFSF for that."