The greenback was a one way bet since June when I had strongly recommended selling the Euro at 1.12 and the British pound at 1.31 since relative interest rate spreads/economic data momentum and central bank monetary policy all screamed another “buy me” spasm for King Dollar. The macro tea leaves got murky last week even as the war in Gaza escalates to IDF bombing raids in south Lebanon, Damascus/Aleppo airports, new kill zones in West Bank refugee camps and a chilling warning by Iran’s Foreign Minister.
So I will not succumb to the temptation to short the buck for a 5/20 moving average crossover against the Euro and the quid even as the US Dollar Index fell 0.5% last week despite the white hot 5.4% Atlanta Fed, GDPNow and spike in the US Treasury note yield to 16 year highs at 5%. I have learnt the hard way not to ignore Sherlock Holmes’s “why did the dog not bark” query in the three dimensional FX chess game. The US dollar should have surged last week but it did not. The Euro and the British pound should have hit my 1.02 and 1.18 targets after the geopolitical shock of October 7th should have triggered a tsunami of safe haven cash into the eager embrace of King Dollar but it did not. Is the market now telling me that it is more worried about America’s $1.7 trillion budget deficit, Biden’s $105 billion war fund request to Congress or the Republican Party’s descent into the deepest recesses of Clownistan after Jim Jordan’s farcical abortive bids to be anointed Speaker? Is the cause of the dollar swoon last week due to something big and nasty brewing in the secret power games of the samurai in the Empire of the Rising Sun? In other words, what’s cooking in Tokyo?
The asymmetric risk/reward calculus to nibble at a dollar short can most safely be expressed with bottom fishing on the Japanese yen at 151 since the FX gnomes of Marunouchi are convinced that the Bank of Japan is going to make its moves in the JGB markets and/or currency intervention as they did last October. Core inflation in Japan was 4% in September and thus the monetarist logic for a policy move by Governor Ueda is irrefutable. I do not know whether they do trick or treat/pumpkins in Japanese culture but the Bank of Japan board meets on October 31st Halloween, as does the FOMC in Washington. Since Powell will do squat, this would be the optimal moment for the Bank of Japan to tweak its yield curve control policy that has made it such an outlier in global central banking and given my tribe of speculators a hunting license to print money selling yen against the dollar, a 25% bonanza trade on a mere 2X leverage.
While I am grateful for the lavish gift the Bank of Japan gave us on the short yen trade, I also know that the trend is only your friend until the trend comes to an end. Axl in Guns N Roses had it just right. Nothing lasts forever. We both know hearts and YCC can change. It’s hard to hold a candle in the cold November rain. Yo BOJ, tweak now or twerk later.
Also published on Medium.
