What You Need to Know about the Yen Going into the Week

Sorry for any gramatical and spelling mistakes, it’s 2am here and I need to sleep.

Okay, so on Friday, the Yen did this (against the USD)…

Incase you weren’t glued to the screen, don’t feel bad. Everybody missed it because the move came after a surprise rate check by the New York Fed. But a few hours before that, there was another smaller move lower after the BoJ held rates at 0.75% but the pause was deemed a ‘hawkish pause’ because a) they had recently hiked in December and they needed time to see what the effects were before hiking again, and (b) given the fragility of the JGB market, a hike would have been disastrous. BUT… there was one dissenter who voted for a hike to 1%! This detail is really interesting and seems lost to many because it tells you that there are fears among some (well, at least one) members about being behind the curve on inflation (like the Fed were) and letting it get out of hand. Anyway, hawkish pause, markets breathe a little, then the NY Fed call CitiBank and BAM!

About that call, everybody believes that the NY Fed acted on behalf of the BoJ, and there are good reasons to assume that, but there’s no way to know for sure so it’s a bit irritating how cocksure some of the news outlets are in reporting this. People think this is the case because the BoJ often use the NY Fed to do spot checks in the US session, and if you recall how the last yentervention went, all attempts to intervene were faded by the market, so if they want to intervene this time, they need a coordinated effort with at least the Fed and maybe other banks. Nothing would be more catastrophic for the BoJ right now than a failed intervention attempt given how fragile the JGB market is, and they need to maintain their credibility to spook bond vigilantes. But that said, there are no reports of such an agreement and any rumors of the same can be safely ignored because they crop up every now and then but nothing ever happens.

It matters who asked for the rate check because it shows who is worried about the Yen falling further. If its the BoJ, nothing to worry about, but if it’s the NY Fed or anyone else, that’s a big problem because someone out there could be very worried about contagion risk from JGBs. In this post, I want to give some background helpful in understanding what’s going on with JGBs and then explain the contagion risks and what role the Yen plays in all this plus how I’d trade it right now. Quick disclaimers: 1) Yada yada not investment advice, and 2) I’m not a Yen expert (no one is especially right now) nor a macro expert etc. I’m just sharing what I know and think.