Yuan’s Rollercoaster and JPY’s Floor

USDCNH & the Current Market Setup for Going Long JPY

China Yuan

🇨🇳Following Friday’s unusual and alarming sudden and steep drop in the yuan (USDCNH +0.75% through 7.25 level that’s been defended for months) which took Asia region currencies down with it (AUD, KRW, TWD and even JPY - which, in my view, is a major overlooked contributor to the head scratching post-BOJ rate hike JPY weakness).

PBOC flips back to yuan strengthening posture at Monday 🇨🇳China open:

CNY fix at 7.0996 vs 7.222 estimates, more than +1,200 pips above for the strongest fix vs estimates YTD. USDCNH is now -0.5%, on its way to erasing its losses from Friday.

Many reasons that China suddenly letting the yuan weaken on Friday was/is concerning, but one in particular is because of the yen - which has been weakening alongside the yuan. USDCNH & USDJPY both rise to their respective upper levels of tolerance - though the yuan still has a bit of a cushion, USDJPY has been right on the fence of breaking through its Oct’22 yentervention highs of 159.96 - should it get to/through 152+, that could trigger a breakout move and cross asset volatility in USD ↑, US yields ↑.

Friday’s move in dollar yuan (and dollar yen):

If USDJPY followed USDCNH’s magnitude of the move higher last session, we could be looking at a new USDJPY 3-decade high breakout

And we can then expect 🇯🇵Ministry of Finance to step in and conduct a unilateral yentevention blasting tens of billions in USD at market- which will further exasperate cross asset volatility, especially if it triggers a JPY short squeeze in a heavily crowded net short JPY positioning. Remember, 🇯🇵yentervention #2 from October 2022 turned global macro markets around: not only marking top tick in USDJPY and then sharply reversing the trend, but also (then) top tick in 10Y US yields.

🇯🇵MOF’s Kanda, Japan’s Vice Minister of FX Market Meddling, made his aggressive jawboning statement first thing this morning, before Japan and China market open.

See previous yentervention article below for in-depth explanation of market implications:

Yentervention: World’s Only Defense Against The All-Mighty Dollar

Note that even if we don’t get the Oct’22 sustained reversal move repeat (USDJPY 152 → mid 130s, -1% taken out of 10Y UST yields within 2½ months), large JPY swings ↑↓ can see US Treasuries realized volatility to explode higher - which is not good for anyone - erratic, un-tradable markets and forced liquidation mayhem.

And again - this can all stem from sharp yuan weakness. If China has decided to let the yuan weaken (for whatever reason - but likely due to a decisive shift in PBOC easing measures) - that decision and corresponding (in)activity in yuan support can potentially cause global market knock-on impact.

For today / this AM session open in Asia, it seems China is trying to reverse Friday’s yuan plummet- but that doesn’t mean that their big picture desired direction is continued yuan strength/support. Today’s ‘24 YTD strongest PBOC fixing may just be to mitigate a short term move that went too far too quick- but they did let yuan go on Friday, and without much in state banks’ PM session close buying support. I don’t know why they did (yet), I just know that they clearly did - and that requires us to keep a very watchful eye on PBOC and China.

BOJ and JPY Downside

Pulling some content from my comprehensive deep dive into March’24 Bank of Japan policy meeting for this next section on “yen weakness upon BOJ.”

First- USDJPY has decoupled from US-JP front-end yield spreads:

So, no - JPY downside is not due to USD strength dynamics (EURJPY successfully broke out to multi year high) - JPY downside is due to JPY downside.

And contrary to common narrative - no, JPY weakness upon the March BOJ rate hike was NOT due to a “buy the rumor, sell the news” flow behavior - JPY downside had already been underway for over a week prior to March BOJ, as well as JGB 2Y yields flip to downside after vertically breaking out to pre-Kuroda level highs, and the TOPIX Banks rally flip to underperforming TOPIX index:

If anything, this was a “sell the rumor, sell the news” leading up to, and upon March BOJ.

Also note that even though UST-JGB yield spreads have decoupled from USDJPY, US/JP equity market long/short ratios vs USDJPY remain intact:

So, weak JPY post-BOJ is not from being pre-priced into BOJ and directionally pivoting upon the rate hike, nor is it a USD / FOMC driven move (a dovish FOMC at that) that explains current persistent JPY weakness as the primary forces that everyone is pointing to.

What people are not pointing to at all, let alone in any sort of proportionality, is USDCNH of late.

Market Scenario:

• If China is (for whatever reason) allowing for some CNY weakness in the immediate, even if it’s just to the November 2022 lows, and Japan MOF steps in to yentervene at USDJPY higher highs each time, then we may get some potentially extreme volatility as USDJPY breaks 152+ for a few handles north before getting smacked downwards, then we can expect a period of potentially wild cross-asset volatility while Japan and China play chicken in FX markets. Unless you want to go long already elevated vol (which not for me) - there’s no trade here from my own perspective in that scenario.

• But if Friday’s yuan move was some aberration, and after seeing how sharp the yuan intraday sell off was, PBOC is now back on full guard of the currency and caps USDCNH upside as they did this AM, and simultaneously USDJPY is at its very upper limit of perceived or real yentervention, as BOJ hiking bias vs Fed cutting bias for policy convergence at both ends does get realized (delayed as it may be)- going long JPY here with a tight stop loss seems like a very asymmetric risk / reward. Not with options- as JPY can meander at lows for god knows how long. Just directional long JPY via futures (which just rolled to a new contract on CME), or short USDJPY.

Three of the largest sovereigns and their rate and currency policies are aligned for going long JPY: 1) US Fed cuts/BOJ rate hikes, 2) Japan yentervention, 3) China PBOC yuan defense - all in tandem, with a crowded net short JPY position against these forces. I’ll side directionally with the policymakers.

And for the love of god this is absolutely not trading advice, or a trade idea, or anything in that arena. This is what and how I’m seeing the state of markets at the moment, and conveying my observations to you.

Gold

One last quick comment on the yuan move as it (may) relate to gold- and note that this is a very loose “working” theory to share (i.e. complete tin foil hat speculation)

Yes, gold in USD had a recent break-out, and that was indeed the primary driver of spot gold price action. But here’s another potential angle to think about (or not).

If you look at a chart of USDCNH and gold priced in yuan, you’ll notice that recent sharp spike and quick reversal in gold/CNH preceded the sharp fall in CNH/USD:

Could it be that state insiders with proprietary knowledge of an imminent yuan-support-softening stance jumped ship on CNY and rushed into gold, right before yuan’s “managed” crushing?

It’s not conspiracy theory that within the largest top-down planned economy in history run by a wide scale web of state bureaucrats- there are always those who act in their own self interests. It’s a non-capitalism version of insider trading - zero difference. Ask Xi and his jailed “colleagues” if China has a corruption problem.

Early March, China held its most prominent annual political event - the Two Sessions - where among many closed-door matters, economic planners had set the 5% GDP target. This is also when Xi mysteriously did not allow for the Premier to hold the closing press conference - as per tradition. Needless to say, this opaque economy and agenda just got even more so.

So, either those (many) in-the-know moved to protect their assets, OR, those (vast majority) who are NOT in-the-know may have lost faith in leadership to protect their economic value, and moved to protect their assets.

I’m sure many have bent capital control rules and scrambled out of the yuan during / concluding the Two Sessions- I think even Xi can agree that that happens. The question is when, into what assets, and in enough size to move markets?

Maybe.

Did gold’s spike and quick crash tell us that the yuan was about to sink?

Maybe- and I will get into this more in the coming week. For now- gold traders, watch the yuan.

For the rest of you, keep a lookout for a comprehensive article on the historic March ‘24 BOJ.

Thank you as always.

-Weston

This market commentary on the yuan move was inspired by / at the request of a long time supporter and paid subscriber of Across The Spread, who I had the pleasure of connecting with 1-on-1 on Friday (you know exactly who you are). Paid subscribers / founding members / genuine supporters - this platform is for us to build together. Thank you for making Across The Spread possible.