Just FYI, to help others, there's an important typo in Alf's conclusions. He said the change supports his bearish thesis on European "bonds", but he wrote "rates". That clearly should say "bonds", since the relationship is inverse. I'd like to hear how much he thinks this will affect US treasuries in the intermediate term. I have a large position in TLT and am hoping the bottom is in for the cycle.
Correct Gary, I meant that this decision in Japan would negatively affect European bond prices (particularly the riskiest issuers: Italy, low-rated European corporate bonds etc).
For Treasuries, the relationship is interesting: at first the impact would be negative, but medium term this increases the chances of a global recession and hence should support US bonds.
As a US investor, Alf's recommended etf's mentioned in the last 2 newsletters don't seem to be valid. $LJPY, mentioned today, is not recognized by my Charles Schwab brokerage. Am I missing something?
Powerful write up, Alf. Love the details here. Lot's of my traders were curious on why the USD/JPY fell so sharply. This makes sense!
This is deff gonna be a big move...JPY hasn't changed their Interest Rates since 2016!!!! In fact, they had negative interest rates. The banks were giving more money to the people in which they invested elsewhere in the world.
It'll now be coming back to the hands of the BoJ as you said if they decide to actually raise rates. Thank you so much for sharing the portfolio allocation. As a tactical trader myself, this helps tie things together BIG time.
Hello Alf, excellent and very helpful piece on Japan and the BoJ decision from last night. I'm wondering if you have written any other pieces on Japan in the past to get more background on this important economy or if there is a piece you might suggest written by a colleague or peer. Thanks very much and cheers!
Hi Alf, thank you for the piece. The hedging costs are a function of the significant rate differential. Why not trade the fx swaps market instead of purchasing yen against the dollar, 1 year usd jpy swaps narrowed 50 pips from -690 to -640 Yen pips. Shorting Usd jpy equals a 4.9% cost of carry (1 yr).
Do Japanese investors have to hedge the fx risk on their purchases of UST (other foreign bonds) ?
One quick question: what is the rational to look at 10Y UST yields minus the impact of hedging with a 1Y FX swap? Is this how the relevant accounts hedge their holdings? If so: any pointers as to why they prefer the 1Y FX swap to say a 10Y cross currency swap? This would match maturity of the bond and the term of the FX hedge. Is this due to liquidity/costs or are there other factors to consider?
Welcome! Please be aware these pieces (and much more) is going to be behind a paywall starting Jan 1st, 2023.
I look at 10y yields hedged with a 1y FX swap because that's what Japanese buyers do: they buy long-term assets and hedge short-term, and then try to roll their hedges over time.
Hi Alf, thankyou for your commentary on the Japanese rates change of policy, may I ask your opinion on shorting Japanese homebuilders/REITs, I have read that 70% of Japanese home loans are variable.
They seem a bit late to the party to me. The global recession is likely to remove any hawkish potential from all of the developed world central banks - they will all capitulate when they see unemployment increase significantly (inflation will also be going down). Is this different in Japan? Will inflation be increasing there when it's going down everywhere else?
I see your argument for buying the yen, but the Fed is also still hiking and even if inflation has topped and they don't hike beyond expectations (still a possibility), there are some reasonable rate differentials with the US, so UST are still preferred to holding yen, even if less so.
Also, I see a lot of assumptions going around Fintwit, but it might be a little early to tell how solid is the narrative that's going around about Kuroda's legacy and the BOJ's intentions for the near future. Thanks for the article!
Alf, you have a real talent for simplifying the complex. Kudos and thank you.
Nice compliment, thanks Jon!
Just FYI, to help others, there's an important typo in Alf's conclusions. He said the change supports his bearish thesis on European "bonds", but he wrote "rates". That clearly should say "bonds", since the relationship is inverse. I'd like to hear how much he thinks this will affect US treasuries in the intermediate term. I have a large position in TLT and am hoping the bottom is in for the cycle.
Correct Gary, I meant that this decision in Japan would negatively affect European bond prices (particularly the riskiest issuers: Italy, low-rated European corporate bonds etc).
For Treasuries, the relationship is interesting: at first the impact would be negative, but medium term this increases the chances of a global recession and hence should support US bonds.
As a US investor, Alf's recommended etf's mentioned in the last 2 newsletters don't seem to be valid. $LJPY, mentioned today, is not recognized by my Charles Schwab brokerage. Am I missing something?
Hi Gary!
Don't worry, in 2023 I am going to make 100% sure the ETF/trade ideas I push forward are implementable from all major jurisdictions including the US
LJPY is actually traded on London Stock Exchange.
Try YCL on new york, closed at 34.30 USD today.
It jumped big today, so that error cost you :-(
YCL has now lost 50% of its gain since the BOJ statement (32.96).
Powerful write up, Alf. Love the details here. Lot's of my traders were curious on why the USD/JPY fell so sharply. This makes sense!
This is deff gonna be a big move...JPY hasn't changed their Interest Rates since 2016!!!! In fact, they had negative interest rates. The banks were giving more money to the people in which they invested elsewhere in the world.
It'll now be coming back to the hands of the BoJ as you said if they decide to actually raise rates. Thank you so much for sharing the portfolio allocation. As a tactical trader myself, this helps tie things together BIG time.
I am glad you see the value, Vladlen!
Thanks for answering my question re Fx. Terrific write-up that I'll have to read a couple more times to fully grasp.
Thanks, James!
That's exactly what you must do. Review, takes notes, watch it happen in real life!
Hello Alf, excellent and very helpful piece on Japan and the BoJ decision from last night. I'm wondering if you have written any other pieces on Japan in the past to get more background on this important economy or if there is a piece you might suggest written by a colleague or peer. Thanks very much and cheers!
Yes, Charles I have!
If you scroll through the archive you'll find a longer term piece on how Japan leads the way for Western economies
Hi Alf, also would shorting CAD/YEN be better then shorting USD/YEN?
I am just reading this now after I posted the same idea.
Cheers
Hi Alf, thank you for the piece. The hedging costs are a function of the significant rate differential. Why not trade the fx swaps market instead of purchasing yen against the dollar, 1 year usd jpy swaps narrowed 50 pips from -690 to -640 Yen pips. Shorting Usd jpy equals a 4.9% cost of carry (1 yr).
Do Japanese investors have to hedge the fx risk on their purchases of UST (other foreign bonds) ?
Good point!
The answer is that not always they have to, but very often they do hedge FX risks.
And yes, they do that via FX swaps mostly
Alf, I really like this, please keep them coming!
One quick question: what is the rational to look at 10Y UST yields minus the impact of hedging with a 1Y FX swap? Is this how the relevant accounts hedge their holdings? If so: any pointers as to why they prefer the 1Y FX swap to say a 10Y cross currency swap? This would match maturity of the bond and the term of the FX hedge. Is this due to liquidity/costs or are there other factors to consider?
Thanks
Welcome! Please be aware these pieces (and much more) is going to be behind a paywall starting Jan 1st, 2023.
I look at 10y yields hedged with a 1y FX swap because that's what Japanese buyers do: they buy long-term assets and hedge short-term, and then try to roll their hedges over time.
Hi Alf, thankyou for your commentary on the Japanese rates change of policy, may I ask your opinion on shorting Japanese homebuilders/REITs, I have read that 70% of Japanese home loans are variable.
I should do some research there
They seem a bit late to the party to me. The global recession is likely to remove any hawkish potential from all of the developed world central banks - they will all capitulate when they see unemployment increase significantly (inflation will also be going down). Is this different in Japan? Will inflation be increasing there when it's going down everywhere else?
They are definitely late, Aidan
I see your argument for buying the yen, but the Fed is also still hiking and even if inflation has topped and they don't hike beyond expectations (still a possibility), there are some reasonable rate differentials with the US, so UST are still preferred to holding yen, even if less so.
Also, I see a lot of assumptions going around Fintwit, but it might be a little early to tell how solid is the narrative that's going around about Kuroda's legacy and the BOJ's intentions for the near future. Thanks for the article!
Welcome!
Interesting reaction in precious metals. I suspect because USD is the most important variable for them.
Merry Christmas Alf, & best of luck with your venture in the new year!
Thanks, Rich!
Thanks Alf. I really enjoy how quickly you respond to macro economic events! Tough day for commodity traders for sure.
Welcome, Ryan!
Does this affect the carry trade substantially?
Yes, as now the cost of funding shorts in Japan becomes more expensive
Successively a lots of top winners momentum trades are being shut
That's correct