DXY is fast approaching critical support. If it breaks down, and why not, given it is now a measure of the madness of the POTUS, then all bets are off on everything.
AUD is more than the mirror image.
Supported by rate hike fever and the roaring JPY.
Rushing past the plodding CNY.
Golden parabola.
AI metals less so.
RIO rocket.
EM rocket, though China testing it.
Junk toys with a breakout.
As yields calm down.
And stock bounce. S&P has a bullish ascending triangle.
However, JPY is today’s tail risk. Having contained yields, at least temporarily, the plunge protection team is working on JPY.
We are not talking about the Plaza Accord 2.0 or anything, but…
- Tokyo might be coordinating policy with the US to strengthen the currency through a coordinated response with Washington.
- A joint response with the US could drive a new narrative and help strengthen the yen, as unilateral intervention is an effective yet limited tool.
- Other possible ways for Japan to accomplish a stronger currency include unwinding an approach that previously weakened the yen, reducing Japan’s debt, or using the element of surprise to influence the foreign-exchange markets.
Whatever it is, it comes with risks. Via TME.
JPY dangers
A stronger JPY could be dangerous here. If the yen snaps higher too quickly:
1. Carry trades unwind
2. Foreign investors dump risk
3. Domestic capital repatriates
4. Global fixed income feels the shock (JPY is a major funding currency)
This is the classic sequence we’ve seen ahead of previous global risk-off episodes: JGB stress → Yen strength → Global deleveraging → Risk-off.
Chart shows SPX vs JPY. SPX typically dislikes sharp JPY appreciation, and the current divergence between the two is notable. Watch this closely.
Source: LSEG Workspace
Watch this carefully
Hartnett Friday poetry: “…biggest risk to max bull Q1 consensus = rapid appreciation of super-weak yen, Korea won, Taiwan dollar (BoJ hike, US QE, Japan-China geopolitics, bad hedging…) triggers global liquidity tightening as Asia capital outflows into US/EU/EM assets to recycle $1.2tn current account surpluses reverse; watch for “JPY up, MOVE up” risk-off combo.”
Source: LSEG Workspace
Hmm, if this intervention is too strong, all Asian currencies may indeed follow JPY higher, including AUD.
If this impacts MOVE, risk will evaporate.
It doesn’t make it any easier for the Fed to intervene with YCC if DXY is crashing, though paradoxically, it would probably end a run on the currency via “don’t fight the Fed.”
For Aussie investors with overseas assets, the AUD hedge has turned into a loss accelerator in these circumstances.
Gold is the obvious hedge, but jeez, “overheated” does not quite say it!
