Trading the JPY

The Bank of Japan is heavily bearish. With Japan battling with deflationary pressures for years and a huge QE program. The Bank of Japan’s prognosis remains bleak.

The fact that the Bank of Japan is projected to keep interest rates on hold while the rest of the globe is expected to raise rates has lately resulted in some heavy selling from asset managers and leveraged funds.

With the BoJ so pessimistic, rate differentials between the Japanese 10y and the US 10y are normally only seen in the ebbs and flows of the US 10 y. Keep in mind that the Bank of Japan has yield curve control over its bond yields. So, here’s what you need to know:

A dropping US 10-year yield equals a rising JPY. And a rising US 10-year yield equals a dropping JPY. 

This correlation is not always ideal because it may ebb and flow, but it is something to keep in mind while trading the JPY, particularly the USDJPY. Take a look at the USDJPY chart below to see how it relates to the US10y. 

Rising oil prices are negative for the JPY because higher-priced petroleum draws JPY out of Japan. Japan imports the majority of its oil from other countries. And a weak Yen will make those imports more expensive. If oil begins to rise in price, keep an eye on it since this might weaken the JPY.

Eurostoxx

Eurostoxx futures are down 0.7% in early European trade, early deals had softer tones.

German DAX futures are down 0.6 percent; UK FTSE futures are down 0.4 percent. And Spanish IBEX futures are down 0.5 percent. This comes after a more modest performance yesterday, all before US markets took a knock as rates rose in response to Powell’s re-election as Fed chair, so there is some catching up to do ahead of the open today. 

So far, the mood music isn’t as gloomy as European futures predict, but the risk is still slightly on the cautious side. As we seek to get things rolling, the S&P 500 futures are down 0.1 percent, the Nasdaq futures are down 0.2 percent, and the Dow futures are down 0.1 percent.

Kaisa bondholders 

According to a source with firsthand knowledge of the situation, certain Kaisa offshore bondholders who did not receive coupon payments this month have contacted investment bank Moelis & Company for advice on how to handle the situation. 

For context, Kaisa has not paid coupons totaling more than $59 million that were due on November 11 and 12 (both having a 30-day grace period) and is facing another $400 million dollar bond maturity on December 7.

An earlier Bloomberg article said that an ad hoc group of offshore bondholders had also sought legal counsel from Kirkland & Ellis. 

As much as Evergrande is a household brand. It is important to remember that other Chinese property developers are also suffering similar challenges, and Kaisa is the business with the greatest offshore debt after Evergrande.

Germany

The situation with COVID-19 is “extremely, very serious” in various German states. No steps, including lockdown, can be ruled out. 

This reflects last Friday’s viewpoint and simply underlines that local authorities are obviously being stretched to their limits in attempting to get a handle on the newest COVID-19 crisis.

EUR/USD is approaching 1.1200, while USD/JPY is threatening to break over 115.00. The latter, in particular, is worth watching since it highlights the technical potential for the greenback and maybe yen pairings (if the mood is right) in the coming weeks. 

Looking at other markets, gold’s drop on Powell’s re-election is a significant setback to the recent technical breakthrough, but it was not unexpected. 

The important daily moving averages around $1,792-93 are a place to monitor, although gold may drop down around $1,750 before any buying interest emerges.

Aside from that, oil is one that one needs to continue to keep an eye on, and all this discussion of a coordinated SPR release, , is simply begging for a ‘buy the dips’ or ‘buy the fact’ play – even though there may be a kneejerk reaction lower initially.