Archive - Oct 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."

H-E-R-O

For the last 45 minutes, USDJPY has been unable to shake loose of 79.2 by more than a pip or two. Following the SNB and their efforts with EURCHF, which as far as we recall is technically pegged at 1.20, is Azumi now pushing another of our freely floating foreign exchange currencies to a peg, as he soaks up any and all USDJPY offers under 79.20? Gold is down a little (in its knee-jerk response to USD strength reflecting off the JPY intervention) but one has to wonder if slowly but surely we are being reverted to the 'rigidity' of a gold standard? Lastly, we eagerly await to hear the justification for this unilateral defection by a G-X member 5 days ahead of the G-20 meeting in Cannes this Friday (and we can't wait for Schumer and Geithner to proclaim Japan a currency manipulator). Lastly, to all those who so vehemently were debating whether the EURUSD is down or not earlier (when it opened lower), feel free to take a look at the EURUSD chart right...about...now - 150 pips that worthless semantics will never get you back.

UPDATE: USDJPY now +4.5% - over 7 standard deviations - almost 400pips (and 450 pips in EURJPY). ES still hovering at Friday's lows though!

Thanks to Mr. Azumi's clearly unique (and Halloween-centric) perspective on Japanese currency fundamentals, USDJPY managed to peak with a six standard deviation move, bested only by 10/28/08 (what a weekend for a 3 year anniversary!!) before all the way back to 1995. However, as always with his unilateral decisions, the market seems to know best and we have already given back over 38% of the drop. Interestingly, broad risk markets have not enjoyed this move at all as correlations are not helping the Japanese cause and ES continues to leak lower.

Once upon a midnight dreary, while insolvent weak and weary...

Update - It's Official:

AZUMI SAYS JAPAN INTERVENED IN THE CURRENCY MARKET
AZUMI: JAPAN WILL CONTINUE TO INTERVENE UNTIL HE'S SATISFIED
AZUMI SAYS INTERVENTION WAS DUE TO STRONG SIGNS OF SPECULATION - thank god Mrs Watanabe is not speculating on the short side.

Just out from Bloomberg, citing the WSJ:

• CLEARINGHOUSES SAID TO PREPARE FOR MF BANKRUPTCY, WSJ SAYS
• US REGULATORS ALSO PREPARE FOR MF BANKRUPTCY, RESTRUCTURE: WSJ

The EURUSD has tumbled 50 pips in the aftermath of the news as risk just moved to the Off position

In an opinion piece of our own, instigated by the gentlemen at Gold Money, we were asked how we work out whether gold is over or undervalued at any given minute. What a question at the best of times, much less now! What we came up with was the following, something which encapsulates a theme about which we have written much of late: "What is ?value? in a world where the single goal of the powers that be is to deny the market the ability to have its constituents? underlying ordering of wants accurately reflected in the price structure? We have no proper market in capital; severely impaired markets in any number of basic goods; false markets in real estate; distorted markets in labour (hence why so many poor souls are still without jobs); and no certainty about anything except the awful certainty that nothing is off?limits to those who are desperately trying to put Humpty Dumpty together again in time for the next turn of the electoral cycle rather than accepting that he has shuffled off this mortal coil and that it would be better now to see whether at least we can salvage a half?decent omelette out of the remains?" And that pretty much sums up our commentary on the EFSF—the 'Excruciating Folly of Suspending Finality’ or ‘Endorsing Falsity to Succour the Few’, or perhaps just ‘Europe = Fastow, Skilling & Fuld’.

The big change will be the decreasing acceleration in the rate at which gains will occur.

While the soap opera in Europe lurches from one extreme to another, in the process creating substantial market knee jerk reactions, even though the final outcome is quite clear to most with cognitive bias blinders, the next major catalyst in the macro spectacle will come not from across the Atlantic, but from these here United States, in the form of the Super Duper Committee tasked with finding the $1.2 trillion in deficit cuts needed in order to make the August debt ceiling hike legitimate. As a reminder the debt back then was $14.4 trillion - tomorrow it will officially surpass $15 trillion for the first time ever, meaning that even as the Super Committee squabbles, half the benefit from its "successful" conclusion has already been implemented. And here is where Morgan Stanley's David Greenlaw comes in with a piece in which he makes it all too clear that the Super Committee may be Clark Kent, but it sure is no Superman. "Press reports continue to suggest that the so-called Super Committee, established as part of the compromise agreement to hike the debt ceiling, is foundering. In recent days, Democrats and Republicans have offered competing plans that have little common ground. Republican members appear to remain committed to a no new taxes pledge, which will make it very difficult for the Committee to come anywhere close to its $1.2 trillion target." In other words, just as nothing material or actionable (suffice for some grandiose delusions) came out of Europe, precisely the same will happen in the US, after our own dire fiscal situation is exposed for the naked emperor it is.

The deadline to submit a bankruptcy filing to the Southern District of New York is around midnight, which probably explains why even as MF Global is proceeding at a feverish pace to sell parts or all of it to what appear increasingly skittish investors (who, like China will likely wait until the stalking horse auction to show their bids), it has, as the WSJ has just reported, hired bankruptcy and restructuring lawyers in the face of Weil Gotshal, best known for collecting hundreds of millions in hourly legal fees for its work on the Lehman bankruptcy case, as well as Skadden Arps. It appears that the sale process has not gone quite as well as hoped for, and now the company is bracing for the worst with just under 6 hours left to iron out a going concern solution.