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The
way their announcement clearly caughta lot of people by surprise.
What does it tell us about the exitfrom the
extraordinary policy that
the BOJ has been pursuing? And
does it tell usless about the sort of the the
the move that is comingand more about the
timing of that move? I'm
just kind of wonderinghow we should interpret all of this.
Well, I think part of it isthere's a huge
surprise factor. This
was on a nobody short list. So
I think part of it
has to do with the policy trajectorybased on the fundamentals
and those fundamentals are quite clear.
One is inflation is quite strong in Japanacross
all the countries that we track, the
trends in inflation are higherthan any other country in the world.
And if you kind of think aboutwhat's going
on locally, if
you look at the tankan report,there's significant price pressures
and they're very broad basedand that's hinting
towards a Shinto. Wage
negotiations are
going to be quite high as well,which is basically a confirmation that
the problem is solved in words,kind of move
on with a new policy. The
other side of it is the sustainabilityof maintaining yield curve control
when rates want to continue
to break out of the rangethat they're being
kind of repressed into. So
it's also it's a self-defeating policyat this point because it's costing lots
and lots of money.
So I think
the way that the market is interpretingthis
is kind of like now regardless of
who's there, we know the underlyingconditions of what needs to happen next.
And what needs to happen is the policynormalization
needs need to continue. I
would lean in in the campthat march is wide open
because we got a surprise in Decemberand we
can basically just recalibrate to
new policy settings beforethe new governor takes over in April.
So March to me is very liveand it's very
bullish for the yen, the
way the market might want to trade it. Hey,
Mark, I don't getthen why is trading at 131?
I mean, we're off the lows.
What gives? Well,
part of it too, isso there's a couple of different factors
that like there's the internal factor,
the BOJ factor for the yen,which is is quite
important. We
know that it's undervaluedand it should be higher.
And we also know that ten year JGB ratesto
be higher as well. I
think part of it has to dowith kind of market positioning.
One thing is, is wherewe're kind of seeing
this tension. We
hear a lot from client questions
is like our positioningmodels are still showing.
The dollar is very short.
So there is scope here.
The dollar's trying to build offof the NFP
gains last week. And
it's also, you know, we
don't know markets really understandingwhat the next move is.
I'd say positioning is one side of it,
but if you think about it again, isbasically
trading at a 132 to 127 range. So
the key factor for the next week,besides the nomination
itself, is going to be the U.S.
inflation report.
Mm hmm.
Okay.Well, we'll come to that in just a moment.
I want to ask one more question on the BOJ<br
/>story, if I could. Does
the BOJ, as it makes this pivot, need
a weaker yen in order to providecover for what they -
What they have to do elsewhere.
And are they going to tryand make that happen?
And I'm wonderingwhat a weaker Yen looks
like to the BOJ. Yeah,
I think atthis point they don't need the weaker yen.
It was there.
I think if you think aboutwhat the framework
was for last year, why
they were reluctant to movewhile everyone else was moving,
is they really couched itin terms of gross
national income. They
really focused on that. You
know, if you think about it,Japan is a massive importer of energy
along with the eurozoneand along with countries
like Korea. So
the terms of trade shock that happenedlast year, the BOJ took an approach
that we're not looking at the output gapper
GDP. We're
looking atas a gross national income. And
this is a massive income shock that
they went throughbecause the cost of energy
and the cost of things they were importing<br
/>went through the roof. So
they wanted to stay on holdto provide a cushion
in easing monetary policy and kind of,you
know, easing monetary
conditionsas a function of the energy shock.
They just took a different approachthan everyone
else. And
now that I feel like, again,they've got wages higher,
that inflation itself is more sustainable
now that negotiation wages, wagesshould
be higher in real terms. So
with all that in mind, the fact thatthe yen is extremely undervalued,
I think if it gets stronger from here,it
doesn't really have a negative impact. It
could also limit how
much inflation can movebecause you still need to anchor
it on the upside as well, which is whatthey're
going to try to do this year. Hey,
Mark, what is the knock on effect,though, right now that we can look at in
terms of the bond market,if repositioning
happens, etc.? We're
looking forward to March.How does that affect bonds?
Yeah,it definitely has an impact on treasuries.
So, you know, jujubes go up.
It's kind of taking everything elsewith it.
It's kind of a
you know, it's also a function of youthink
about how things are working in Germany
with ECB, you know, ECB is likelyto be more hawkish than the Fed.
So ten year German bonds, bondsand JGBs
are likely to be driving U.S. Treasuries
at this point. And
also, again, if we do move to the sidewhere the BOJ is reluctant to move,
they have to continue to purchase moreyou
know, more capital to basically maintain
that peg, which meansit has a knock off effect on treasuries.
So basically they're selling treasuriesand
that would also have unintended consequences
for the US Treasury market if
they tried to maintain yieldcurve control. So
I think at the very least, like
the path of least resistancehere is definitely probably
a steeper curve, at least in Japancoming
from the ten year side. Okay,
let's talk about that CPIprint next week.
The anticipation is that we could seea pickup
in inflation in
the United States, Mark. To
what extent is thatalready priced into the dollar?
What would surprise.
Yeah,the surprise factors can be very big.
Everyone should be focusingon the month over
month, core numbers, market expectationsfor
around point four. I
think your playbook is anything abovethat is really going to scare the market.
As I just mentioned a little bit ago,market
is really short the dollar. So
this is where the dollar getsa little bit of its mojo back for
at least a very short termkind of building
on the recent correction. But
that is the only outcomethat is favorable for the dollar.
If we get in linewith expectations or below
where we are back
to risk on backto extended dollar selling. And
actually I think that would bethe move that really kind of encapsulates
a big, big downturn in the dollarif we
do get another kind of weak or
in-line inflation numberbecause it justifies what
Powell is saying isthat growth is good. We
like growth and growthcoming back is okay
if it doesn't providean impulse to inflation.
And if inflationis kind of doing its own
thing now
and it's moving lower and we seedisinflation for the next couple of months
and growth is coming back,that's actually
the best environment you
have for undervaluedglobal equities relative to the U.S.
and a weaker dollar.
So that seems to be,you know, soft landing
in the U.S. Plus,
disinflation would
be very beneficialfor the weak dollar narrative,
which we think is going to startto take shape
again after this correction. Mark
- how do you play it?What's the best cross to play with that?
As we just mentioned, youdefinitely want
to be long yen on that. So
if you're you know, inflation comesas expected it's convergence of rates
Japan to rest of world other thingyou'd want
to think about as well. This
is very bullishfor emerging markets in terms of carry
so like Brazil,you know if you think about
LatAm, if
you think about Eastern Europein some parts of Asia, India,
Indonesia, Hungary, Brazil, Mexico,they're all
carry currencies. They
would all benefit from their disinflationary
impulses in the shifttowards EM exposure in general.