Opportunities can be found when there is clear divergence
JPY weakness is likely to be a permanent feature for a long time
US Treasury Bond yields continue to push higher as the market pricing now shows the expectation is for the US Federal Reserve to hike interest by 8.5 increments of 0.25% this year. The US 10-year Treasury bond yield is now trading above 2.50%, the highest since mid-2019.
On the other hand, the Bank of Japan announced its offer to buy unlimited amounts of 10-year Japanese Government Bonds (JGB) at the yield of 0.25%, effectively capping the yield at 0.25% and reiterating their commitment to keep monetary policy extremely easy. This caused the JPY to weaken by 0.8% on the day, adding to the loss of almost 7% against the USD on the month.
With aggregate positions showing that retail investors are net long more than 2.1 billion USD of JPY, the market is clearly positioned wrongly in the FX market for this divergence in interest rate path of these two countries.
When the retail investors are piled into positions that are against a trend that is seemingly relentless, expect fireworks in the weeks ahead. With the BoJ committed to keep interest rates low and continue printing money to buy bonds, JPY weakness is likely to be a permanent feature for a long time to come.
TRADING TIP
Avoid Tunnel Vision
As a trader, you should not concentrate solely on the market that you are trading but get a general awareness of the broader market. Like how no man is an island, markets are also not siloed.
A move in one market can cause spillover effects in other markets. Take for example the bond market, a rise in US bond yields usually results in a stronger US Dollar in the FX market.
Sometimes, various markets can move together as well due to a change in a common fundamental driver. This can be seen in the gains of the crypto market and equity market as risk sentiment improves.
Understanding the interconnectedness of markets will help you understand and deduce the movements of individual markets easily.
WEEK AHEAD
Bank of England Governor Bailey speaks tonight, further dovish comments are likely following the dovish statement from 2 weeks ago.
US JOLTS Job Openings will be out on Tuesday, an increase of 260k is expected, indicating strength in the jobs market.
US ADP Employment Change will be released on Wednesday but response should be relatively muted given the more significant job data, US Nonfarm Payrolls and Unemployment rate, will be released on Friday.
The OPEC+ will meet on Thursday, with pressure on the Oil producers to increase output, we may finally see an output increase announced in this meeting.
TRADING PLAN
1. Currencies:
CNH — Keep short USD against CNH. USDCNH is rising as USD is strengthening due to higher US bond yields again. However, Resistance at 6.40–41 is likely to hold for now. Stay short.
EUR — Short the EUR. EUR continues to drift lower. Stay short. .
2. Commodities: Uranium & Energy — Stay long.
3. Stocks:
US Stock Index: Stocks continue to well despite much higher US bond yields. Buy on dips still a valid strategy.
Single Stocks: Stocks in the TrackRecord Model Portfolio are all starting to trade strongly. The uptrend is resuming soon.
Key risks: The Ukraine situation is the primary focus and comments from Fed officials on the pace of future rate hikes will affect interest rates expectations.
WHAT HAPPENED YESTERDAY
- The US treasury yields roared on Friday as market expectations of a 0.50% rate in the May meeting grew. The 2 year rate rose by 0.17% (17 basis points) to 2.30% while the 10 year rate rose by +0.14% (14 bps) to 2.48%.
- The strength in the equity market was sapped on Friday as rates increased. The S&P 500 was up +0.51% (intraday high: +0.51%), Dow Jones rose by +0.41% (intraday high: +0.67%) while the Nasdaq inched lower by -0.08% (intraday high: +0.27%).
- The crypto market had a stellar performance over the weekend. Bitcoin was up 5.2%, nearing crossing the 47,000 level and just 1.9% below the open price of 47,740 for the year. Ether traded higher as well, increasing +4.8% to 3,295. The strength continued on in the Asian trading opening hours with BTC breaking above 47,000 and ETH 3,320.
HEADLINES & MARKET IMPACT
India leans toward continued import of Russian coking coal
Notable Snippet: India plans to double imports of Russian coking coal, a key ingredient in making steel, the minister said. He said the country had imported 4.5 million tonnes but did not indicate the period he was referring to.
Western countries and Japan have slapped unexpectedly heavy sanctions on the government of President Vladimir Putin and people associated with him. India, a major buyer of Russian goods from commodities to weapons, has abstained from several key United Nations votes condemning the Feb. 24 invasion.
WHAT WE THINK: India stands at a favourable position in the current geopolitical standoffs between Russia and Ukraine as well as China and the Western Bloc. With favourable prices for building materials and possibly energy, the Indian economy is poised to benefit.
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White House Wants Public Comments on Crypto’s Energy Use and Environmental Impact
Notable Snippet: In his executive order on crypto issued earlier this month, President Joe Biden tasked the White House’s Office of Science and Technology Policy (OSTP) with preparing a report on the “potential for digital assets to impede or advance efforts to tackle climate change and the transition to a clean and reliable electricity grid,” according to a document published in the Federal Register on Friday.
The energy impact of crypto — particularly, of energy-intensive proof-of-work crypto mining — has become a flashpoint in recent years as lawmakers around the globe have floated proposals to ban proof-of-work mining, citing environmental concerns.
WHAT WE THINK: This is a development to watch out for given the current concentration of miners in the US (estimated 49%) and a strong environmentalist base in the country.
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EU and U.S. agree to new data-sharing pact, offering some respite for Big Tech
Notable Snippet: The European Union and the U.S. on Friday announced they had agreed “in principle” to a new framework for cross-border data transfers, providing some much-needed relief for tech giants like Meta and Google.
For over a year, officials on either side of the Atlantic have been hashing out a deal to replace the so-called Privacy Shield, an arrangement allowing firms to share Europeans’ data to the U.S.
Privacy Shield was invalidated in July 2020, striking a blow to Facebook and other companies that had relied on the mechanism for their EU-U.S. data flows. The EU’s top court sided with Max Schrems, an Austrian privacy activist who argued the existing framework did not protect Europeans from U.S. surveillance.
The new agreement will “enable predictable and trustworthy data flows between the EU and US, safeguarding privacy and civil liberties,” European Commission President Ursula von der Leyen said Friday, without offering much additional detail on how it will work.
WHAT WE THINK: The invalidation of Privacy Shield last year coupled with a drift of Europe from the US heavily hit the stock prices of Meta and other big tech companies. However, the Russia-Ukraine war has united the 2 blocs once again to cooperate on numerous fronts. We foresee more developments from the synergy between the 2 blocs.
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SENTIMENT
FX
STOCK INDICES
Best,
Phan Vee Leung
CIO & Founder, TrackRecord
