My daily habits are coming quicker and the processing of information comes a bit faster each and every day. It’s really cool feeling my progress!
Anyways, just a quick question on Japan Fin Min Aso’s comments about not buying foreign bonds.
This was a positive for the JPY and I watched all the JPY crosses drop as the comment came out 5 minutes before the BoJ Meeting Minutes.
So, as this is a positive for the Yen, the first thing I thought was, “Why?”
My understanding is that buying foreign bonds is buying the debt of foreign countries, and that flow of cash is beneficial to other countries.
Moreover, I know that Japan’s monetary policy is to keep the currency artificially low to boost domestic growth.
So, I guess they’ve been buying foreign debts to keep the Yen weak to help boost their exports (strong currencies are good for imports and weak currencies are good for imports if I’m not mistaken)?
And Aso’s comments about not buying any more foreign debt means they’re not keeping the Yen as weak anymore and caused the strength we saw in the Yen yesterday?
When you can figure out what information is important, what information is not important, and play out the scenarios in your mind and interpret the information flow properly, then it does feel really good as you are transforming yourself. You are developing great skill in having an interpretation advantage that will last you your whole life.
As for Fin Min Aso comments.
The reason the JPY got stronger (USD/JPY dropping), was because part of the market was priced in expecting a decent probability that Japan may go and buy up foreign bonds and/or stocks. Priced in, means that there were a certain amount of capital committed to that scenario. So lets say there was $5 billion committed to that scenario by the news/sentiment/fundamental/macro players. Remember the markets are a battle of different scenarios.
So if the scenario of Japan buying foreign debt/stocks doesn’t materialize, or the probability goes lower, then that capital that was stuck long USD/JPY betting on that scenario starts to unwind their positions. Also any opportunistic speculators that caught the information flow early and decided to jump on the information shorting USD/JPY as they were trying to anticipate the unwinding of USD/JPY by certain macro traders.
Ever since Abe said he was mulling over foreign bond purchases, the market has been trying to figure out a few key questions:
- The probability of it happening
- And if it does happen, then how much capital will be committed?
As the probability goes higher that it will happen, then that will tend to generate bullish order flow for the JPY pairs. But the probability of it happening is not the only variable. The market wants to figure out how much will they buy? Because if they only buy say $1 billion worth, that is a drop in the bucket. If they decide to buy $50 or $100 billion, then that is more firepower.
Most central banks do financial operations and buy and sell the financial instruments such as bonds, notes, and t-bills, and corporate bonds of their own country. For example the Federal Reserve purchased a bunch of subprime debt, and other housing related mortgage backed securities and held it on their books for a few years. The Fed is purchasing US treasury bonds in their QE operation.
The Bank of Japan does similar things within their own country.
If Japan govt /BOJ buys foreign debt/stocks, then they will have to sell JPY and buy the foreign currency. Which is a foreign exchange transaction, and it can impact the JPY pairs. That is the one type of order flow. Then there is the psychological and speculative order flow by the news/sentiment/fundamental/macro players that go to buy up USD/JPY once they see that news.
The JPY was strong for a really long time, and verbal intervention and occasional actual intervention was preventing it from breaching the 75.00 level. Japan would of loved to have a weaker yen much faster. But it was only until Shinzo Abe came, where he started talking really tough and taking aggressive action. He is politicizing the BoJ, getting them to QE even faster, and expanding their inflation target to 2%. Now, Abe gets to pick the next BoJ governor. Abe was talking about changing the BoJ law to allow for the foreign bond purchases, etc from last November/December. Abe was talking about more fiscal stimulus, about the BoJ buying construction bonds, etc. He is really trying to hammer the JPY from all sides – both monetary policy and fiscal policy.
Just imagine if Obama was talking as tough as Shinzo Abe is. Imagine if Obama said he wants the Fed to double the inflation target to 4% or 5%, QE unlimited until it reaches there, bring in an even more QE friendly central bank chief, more fiscal stimulus, etc, etc. The dollar would get annihilated by 2,000 pips.
The Aso comments do conflict a bit with what Abe was saying. But if Abe has a lot of sway, he may be able to change the BoJ law and push it through. I guess it depends on how much political capital he has, and how much pushback he gets, and whether he really thinks it is in Japan’s interest.
But that is not the only scenario going on in USD/JPY. It has also gone up due to rise in risk appetite, and stronger US economy. If the Fed hints at ending easing sooner rather than later, that could also cause USD/JPY to go up, as US bonds would go down, causing rising yields, and cause more macro buyers in USD/JPY.
Personally, I think it is bad economic policy that Abe is politicizing the BoJ. Trying to prop up the market excessively with a lot of QE and trying to improve growth by increasing inflation target, etc is not the best of ideas. The same can be accomplished with structural reforms. But the structural reforms can be politically difficult. So Abe is turning to the classic monetary and fiscal measures. The JPY was too strong and hurting the Japanese economy, but he is building up risks in another direction with his policies.
But as a trader you need to keep your beliefs about what is prudent economic policy separately from what is proper trading strategy.
If Abe is going to put in place certain policies or threaten to do so, and USD/JPY is going to go up 2,000 pips, then you shouldn’t be crazy enough to try to buck the trend just because you have a personal view that it is “bad economics.” Let the politicians do their thing. You focus on trading well and making money.
As Paul Tudor Jones once said:
At the end of the day, your job is to buy what goes up and to sell what goes down so really who gives a damn about PE’s
That is what it is all about – the liquidity and future volatility. You want to have liquidity to get in and get out, and you want volatility for the market to move so you can make money. (Of course it can be a bit more involved than that when you go to decipher why the market moved in the past, the reason it can move in the future, anticipating the proper news/sentiment/fundamental/macro players, and figuring out the battle of scenarios that is going on.)