Entering the JPY bearish season

*We are soon entering the most JPY bearish season of the year, post the fiscal Japanese year.
Normally the run up to the Japanese fiscal year end means a quite strong season for the JPY. As pointed out in previous pieces, not this year. I dont expect it to happen in the two weeks that remain either. Rather the opposite.
I am long Gbp/Jpy, Eur/Jpy via options.


*New variables driving FX

As the dust settles from a quite volatile start to the year (despite VIX being lower than in November of last fall), it seems new variables will be driving FX from here.

If earlier the rate differentials were dominating FX movements in a world of liquidity, this is not necessarily the case anymore.

With interestrates converging towards zero, growth and relative growth differentials combined with policy credibility seems to be taking over as the two FX driving variables.

Earlier, assetclass correlations were relatively stable. Due to a lack of liquidity and risk absorbtion in the market, this is no longer the case. This will open up for very interesting assetclass plays going forward, as the order of which assetclasses move will likely shift going forward, depending more on market positioning as long as liquidity and risktaking remains low.



* On the CEE front, growth believers are in - too early?

On the macrofront, developments continue to deteriorate, although squeezes in the CDS market, narrowing the CDS spreads, has pushed local currencies stronger. This has created a short term positive sentiment for the market. With the gloomy shortterm outlook for the USD this could continue short term, although I am now short PLN, HUF, TRY, being light on my feet.

Unless liquidity and risktaking increases, I doubt differentiation will increase for the CEE countries. Besides, although more stable macro outlook in Poland, compared to Hungary, Poland still have their massive corporate hedging dilemmas, where the parliament are to test whether FX options contracts can legally be deleted. Although extremely unlikely, this will continue to remain a worry for the market.



*Market still hooking up to any positive news

Markets wants to be bullish and will be looking for any reason to be so short term. While this is alright, the murky macrobackground will be in desperate need of bank pull for it to continue higher from here.


*The Geithner plan mumble
Suggestions have been made that Treasury Secretary Geithner would be preparing a toxic asset plan that would entail the goverment guaranteeing a minimum level for these assets. Then letting private investors and taxpayers making up the difference to match the balance sheet value of the banks. In other words; If this is correct, The US Treasury would assist the US banks in fudging the asset valuations, or in other words; cooking the books.

To me, this is a lousy suggestion, no matter how you twist it. The worst and most dangerous part of it would be that it might set precedent for other governments and banks globally. It would certainly be favoured by politicians, since it would follow the least part of resistance and problems would be postponed further down the road by not dealing with them hear and now.
Frankly, this would be what got the world into this serious trouble in the firstplace - not marking to market. Its is plainly silly, naive and dangerous. Lets hope it does not happen.


As always, good luck





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