Macro Dragon: DollarYen Technicals Screaming "Buy, Buy, Buy, Buy"...
Global Macro Strategist
Summary: Macro Dragon = Daily Cross-Asset Global Views
Macro Dragon: USDJPY Technicals Screaming a Breakout Buy
Before we get into it, for those that are back – or on the way back in – from what was hopefully a restful year-end holiday break, Happy New Years!
Let me sincerely (hand on liver) wish you, your families & teams the best of 2020. May your health, vigor & experiences be excellent & full of fun + laughter. May you continue to grow & develop yourself. May you be awash in gratitude & contribution plus fall [tail] backward into more money than Bezos.
We’ll be shaking things up from KVP’s side, so expect a lot more trade views going forward, as well as 20 long-term trades views for 2020 – which KVP will do a special piece & mini-series on.
Ok let’s get after it…
The Taal Volcano... Update [Part One From Yest]
So we flagged the eruption that had kicked off over the weekend into Asia Mon yesterday – with the potential view that given that the local capital markets (Equity & Debt) were closed, airport had been shut down. We may have seen some panic / need to hedge on the Philippine Peso, so a higher USDPHP (Saxo also facilities NDFs) – instead we actually got a stronger peso, as USDPHP closed down -0.32% to 50.413, post hitting one year lows of 50.321. Hard to say if there was any central bank support here, that is likely to be clearer down the line.
From what KVP can gather, thousands have been evacuated from the immediate area around the Volcano (which is c. 40miles south of the 30m people living in the greater Manila area) and we still have a 4 / 5 emergency rating – entailing further eruptions from within hours to days, i.e. same rating that we got upgraded to over the weekend/Monday.
These brilliant pictures, both shocking, sad & post-apocalyptic will give some context to the severity of what’s on the ground. Our thoughts & well wishes go out to the people on the ground, both those helping with the rescues as well as those just trying to get to safety.
From a markets perspective, as we said looks like a yawn so far from the peso. Things would have to dramatically get worse & have a much more adverse effect on the capital city of Manila before we see more adverse effects. Its unclear whether or not the stock exchange will also be closed today, as KVP can find no updates as of this morning Singapore 09:00. It does look like they have resumed some flights out of the airport, which should be taken as a positive if green-lighted under the right safety protocols.
Still would maintain the tactical bearish peso skew, so long USDPHP until its very clear that the worse is behind us on the Taal Volcano. Its also worth noting that if markets are not open, folks cannot sell their securities in the Philippines & thereby sell pesos for dollars.
Risk to all this is of course, a storm in the tea cup in regards to local financial markets effects.
Still early days.
…Meanwhile Equities Grind Up…
We already were flagging the risk-on party from last wk, yet interesting to note the FX manipulator taken off China – should not be too surprising, yet the market will grasp at what it wants to grasp at given sentiment. Bullish sentiment & the sun came up, yay! Bearish sentiment & the sun came up, booooo!
VIX is basically at a 12 handle, which is very much on the low side of things historically – its worth noting that intuitively in a lower yield world, volatility is structurally dampened. That’s not to say that we cannot get spikes, but generally the average vol will be lower.
Anyhow, +0.70 to 3288 on the SPX – those that recall the breakout flag from KVP c. Oct/Nov last year will remember that the inverse head & shoulders suggested 3500 within 6months time – so c. 3months to go for another odd 210 points.
Very doable, especially in the current US/CH euphoria – which we talked about in Phase One signing. Take away – have a contingency plan for when US/CH trade relations break.
KVP thinks it’s a 90% chance at some point this year given US elections (likely back end of 1Q/2Q), as well as the fact that phase 2 & 3, etc are pipe dreams – unless they are once again window dressed & wrapped up in being broad in vision yet short in detail.
…DollarYen looking ready to rip up higher…
Anyone taking a look at daily or weekly bar chart of DollarYen, will see that we are in the midst of attempting a breakout higher – as we are now flirting above the critical resistance level of 110.
What is even more astonishing is that USTs are not even at recent highs (1.95 on 19 Dec) , they are sitting at c. 1.85/1.86%, with JGBs at basically 0% (same level they were ON 19 Dec) – so if we get another push higher on USTs, which is highly likely, say to 1.96 retest to 2.00 new test – it will be interesting to see just how much higher DollarYen can climb.
Its worth noting from an FX volatility perspective, we are pretty much sitting at all-time-lows on DollarYen volatility – i.e. historically the premiums for calls or puts have never been so inexpensive.
So for context (using monthly closes) the 3M ATM USDJPY vol is at 5.18, vs. an avg. 9.86 since 2003, during the GFC crisis we got to 23.31in Oct 2008 & in the back end of 2016 we got to 12.86. Over the last year the range has been 8.36 – 4.99, with an avg. of 6.30
Back on USDJPY technicals & directional views:
Big lvls to watch out for on FIBO wkly are 110.70, 112.17 & Sep 2018 high of 114.55. Psychologically 112.00 is the next big lvl if we can get a weekly close above 110 (ideally two). If KVP was looking to play the breakout from here (long USDJPY), it would either be through +4-9m call options (just ATM) or have some tight stops just south of 109.50 if it’s a tactical trade. For a strategic view, once need to be able to ‘hold’ a pullback to 108.50.
Generally speaking if you are playing a breakout higher (lower), we should not come back to a previous recent low (high), let alone take out that lvl.
If KVP was bearish (so short USDJPY), then initially stop would be 110.80 for a tactical horizon – i.e. calling the break-out higher a bluff. If it was more strategic then at least above 112.00 with a target of sub 108 to 106. Its worth noting we got to 107.65 last wk during the US/Iran risk-off to bounce exchange. So definitely opportunities to trade around core strategic views.
Good luck out there today & for the rest of the wk ahead
Wishing everyone a great, profitable start to the year. Best of luck in 2020, may it be your most magnificent yet
On The Radar Today:
(Times would be SGT)
- US: CPI 2.4%e 2.1%p CORE 2.3%e/p, FOMC’s Williams @ 22:00
- CH: Tentative Trade balance
- JP: Current account, Bank Lending
What We Are Reading From SaxoStrats:
- Jakobsen & SaxoStrats team with our 2020: Outrageous Predictions
- Jakobsen's latest presentation on Everything is Perfect
- Garnry on Equities: EM EQ outperform as growth outlook improves
- Hardy latest FX Update: Sterling struggling on BoE Signal + EM on a tear