MAGGIE LAKE: Hi, there, everyone. Welcome to the Real Vision Daily Briefing. It's Wednesday, April 13. I'm Maggie Lake here with Darius Dale, founder of 42 Macro, and we are joined live by my colleague, Weston Nakamura.
For those of who follow Weston on Twitter, he's been all over this yen story, and the Japanese currency broke through some pretty significant levels today. So he was nice enough to get up early. I always think I'm going to say stay up late, get up early. I'm not sure it matters, Weston, because you never sleep these days, because you're all over this story. So what do we need to know? What's going on?
WESTON NAKAMURA: Thanks for allowing me to interrupt you once again, Darius. [LAUGHS]
DARIUS DALE: I love it, man.
WESTON NAKAMURA: Japan blows up every time you're on the Daily Briefing, so you know, delayed indicator. But yeah, so just very quickly-- so dollar yen-- as we know, the yen has been getting crushed. The yen, actually, year to date, is the second-worst performing currency.
And it's second, just by a hair, to the Turkish lira. And if you actually do it from March, it is the worst-performing currency, and that includes the Russian ruble as well. So dollar yen broke through a very key level-- 125.86-- just after Japan cash closed today.
That was a level that was tested a few times, failed-- or held, but it failed today. And then, you saw an immediate jump into dollar yen in the 126 handle for a two-decade high. So the significance of 125.86 is that that is the high print of BOJ Governor Kuroda's tenure.
So Brian, on chart one, if you take a look at this chart, it's basically-- that 125.86 was made back in 2015, shortly before the August 2015 China yuan deval. But basically, from 2013, Kuroda took dollar yen from under 80 to 125.86, so like, 60% move in two years.
After hitting that level, dollar yen fell as low as-- it broke below 100 on Brexit day in 2016, but basically kind of just meandered around. But right now, the fact that it broke through that new level, we're now kind of on uncharted Kuroda territory, if you will. And so that is the significance of that particular breakthrough.
MAGGIE LAKE: Yeah. And Weston, whenever this kind of thing happens, everyone immediately thinks about, OK, where does it go from here? What's the next level? Because sometimes it's like a straight shot. And what's going to be the response, in terms of Japanese officials? So what are your thoughts around that, or what are you hearing? What level should we be looking at, in terms of, is the sky wide open here? And what would prompt a move or a response from officials?
WESTON NAKAMURA: Sure. So Brian, if you pull up chart two, I just want to show everyone, just to remind everyone, the significance of dollar yen. It's basically-- dollar yen and the 10-year US Treasury yield-- those move kind of in lockstep. That's just been the case for some time now.
And so that's, first of all, the significance of-- people were wondering, why should I care about dollar yen? Well, you should care about dollar yen, because it moves in tandem with the risk-free yield, or the risk-free rate. But there's basically-- like, I get a lot of questions on, what level of dollar yen-- or what level the yen will BOJ intervene to stop the yen plunge, if at all?
And so I just want to make two points on that. First of all, actually, the BOJ is not the body that would oversee intervention, should it come to that. Ethics is under the jurisdiction of the Ministry of Finance, not the BOJ.
Hence, this is why-- in large part, why BOJ, who is focused on rate intervention, is, at the moment, solely and staunchly fixated on capping JGB yields, knowingly doing so at the expense of the yen. And then, so the second-- so it's very important to know that it's not BOJ that would do anything with FX.
And clearly, they don't necessarily care about FX for that matter. Second point is that within the Ministry of Finance, the comments that you get from the likes of Finance Minister Suzuki, that they repeat again and again, is that the sharp and extreme moves in dollar yen are concerning and undesirable and all that.
But note that what they're saying is, like, it's not a specific line in the sand, like death-print level, per se. It's the volatility and the sheer velocity of the move itself. So like, take dollar yen at 150. That would be far more acceptable than, say, dollar yen 130, if the path to 150. Were slow, gradual, and orderly, versus like an overnight flash crash to 130, and then back to, like, 120.
Like, that kind of-- that stuff is concerning, because Japan is a major importer. It's a major exporter of raw materials of goods, massive deployer of capital, investment capital, and all that. Right?
So if you actually see on chart three, Brian, there's a chart here of implied volatility using CME CVOL index of yen volatility. And against the, like, G5 basket of peers. And what you'll see is that, historically, yen volatility sits below the G5 peers, but has now surged above G5 peers, and that's with the G5 FX itself surging.
So this is not a normal dynamic in which, like, risk models are based off of, and that can have global cross-asset repercussions in areas that we simply wouldn't know until we do. So yen volatility should be very concerning to all of us, not just because of that tight correlation between yen and US Treasury volatility.
But Brian, if you go to chart-- what was it-- yeah, chart four, yeah. If you look at chart four, this is yen volatility and US Treasury volatility. And so these two are assets that are-- in the world of volatile risk assets, these are supposed to be kind of anchored down, and these are moving up and surging together in tandem. And that is a huge problem for across the spectrum, when you have things that are supposed to be stable behaving very unstable. And--
MAGGIE LAKE: Yeah, Weston, I just want to jump in. Because when you say something like that, it makes me worry that-- is there the potential for sort of unforeseen consequences, or areas of the market we wouldn't think are affected, just because these are used-- these kind of-- nothing's, I guess, risk-free, but less risky, very stable assets have got to be a part of tons of models, tons of portfolios.
This is the basis of the financial system. So when you start to see volatility here, and it's-- and you said the yen is in uncharted territory. Can we even wrap our head around where that starts to sort of create trouble? That's my concern when I hear you say that.
WESTON NAKAMURA: Yeah, so that's a great question, Maggie, and the answer is that I don't know. And I don't, like-- we don't know what we don't know, is the answer. So I have no idea what the potential spectrum of possible knock-on effects are.
I just know that it's not one without consequence, and we'll just after the fact. And then, just because nothing is happening on the surface doesn't mean that there-- there wasn't, like, bombs with wires cut at the last second or anything like that either, right?
But I will note, though, that in the last few days, that airtight US Treasury and correlation has started to weaken a bit. So Brian, if you go to chart five, so you'll see this is just a chart. The top chart is just basically CME yen futures and CME Treasury futures. And you see they move basically exactly in tandem together.
The bottom chart is-- zoom in on the CPI release from yesterday. And you'll see that right upon that release, you see Treasury futures, 10-year Treasury futures just get bid up, like, in an instant, as well as yen futures.
But that's a kneejerk systematic algo move. And then, after that, you'll see yen futures just start to slink back down again, because it just wants to head lower, and it's kind of decoupling. And so that is important, too, that there's a slight divergence and decorrelation that's starting to happen as well.
But having said that, yen and US treasuries are still the most highly correlated among cross-asset pairs globally. But at the end of the day, just putting aside, like, words of officials or whatever-- just looking at their actions, right? The Japan authorities-- as in, the BOJ and the Ministry of Finance as a collective-- it seems that they are prioritizing putting a floor under JGBs than they are under the yen.
In fact, by capping JGB yields, as we all discussed last time, they're doing so at the expense of the yen. You have to pick one or the other, right? So you cap yen-- if you cap JGB yields, and sovereign yields elsewhere hit higher, then the yen is going to weaken.
So the message to me is very clear. For the moment, as long as global yields are on the rise, in Japan, yields are kept. Yield spreads between Japan and the rest of the developed world will widen out. And as long as Japan is in need of importing energy and commodities at ever-higher prices, the yen will continue to weaken by both market forces as well as by conscious choice of Japanese officials.
If Japan, however, starts buying treasuries and the US-- then the US and Japan yield spreads would narrow, and the dollar yen will cap. But if this yen plunge itself is deterring Japanese investors from deploying that capital overseas into the US Treasury market, for example, then that may end up becoming this sort of self-fulfilling feedback loop of higher sovereign yields, wider yield spreads, weaker yen, more volatility in these supposedly non-volatile instruments, and on and on and on, into this vicious loop. So that's the kind of--
MAGGIE LAKE: And that is a completely different regime than what we've been in. So we talked a lot at the macro experience last week in San Diego, the fact that, are we in a different period? How do we need to think about these big changes that are happening, and the fact there's so much confusion? This looks like it just adds another layer onto that conversation.
Weston, I know you've got to jump. Thank you so much for jumping on, because this is, I think, a story that we need to pay attention to, but it's not front and center, especially in the middle of the US trading day when there's so much else going on. So I hope everyone puts it on their radar.
And if you want more analysis and updates, Weston, as I mentioned, is all over this. You can follow him out across the spread on Twitter. Check out West on Trading on our YouTube channel. He's going to have constant updates and do his best to make some sense of it for us all. So if you have any questions, drop them in both those places. Weston, thanks so much.
WESTON NAKAMURA: Thanks a lot, Maggie. Thanks a lot, Darius.
MAGGIE LAKE: I always want to say, get some sleep, but I just-- I know it's not happening. So get back on Twitter.
WESTON NAKAMURA: I got to watch Darius now.
DARIUS DALE: --Wall Street, man.
MAGGIE LAKE: Excellent. All right, seriously. Thanks, Weston. Appreciate it. So Darius, this is a lot to wrap our head around. I know this is something that you have been paying attention to. But like I said, in addition to the inflation and the earnings that are coming out, there's just so much going on.
Any quick thoughts on what Weston said in terms of that yen? Are you going to change anything you're doing now that this is sort of broken through that level?
DARIUS DALE: Yeah, absolutely. So let's take the conversation back to where we were last time Weston and I were on. We were sort of previewing the kind of potential comments that Kuroda made today, which effectively tripled down on the BOJ's yield curve control policy.
And so what does that do? What are the kind of nonlinear dynamic sort of implications of that? On the negative side of the ledger, incremental yen weakness is obviously a boon to the dollar. And on a correlation-weighted basis, it puts incremental pressure on emerging market economies, which have obviously been struggling with the strong dollar and slowing growth throughout the sort of last several quarters.
That also puts incremental pressure on Japan's rival economies, such as China, to incrementally potentially devalue. Obviously, we go back to August of 2015, in terms of the China deval situation there. China may decide not to omit all of its growth concerns at the current juncture, not the least of which is locking down its largest city in terms of GDP and population.
They may feel incremental pressure, coming out of that lockdown, to try to get things going from a stimulus perspective. So anything they do as it relates to expanding the PBOC's balance sheet, cutting triple R, cutting interest rates-- broader policy rates, may have an outsized influence over the Chinese Yuan.
We're not making that call yet. I don't think-- I think it's too soon to make that call. But I think investors need to be keep that risk front and center. On the positive side of the ledger-- and this is exactly what we're seeing in markets today.
Kuroda's commentary-- if you were a Japanese capital allocator-- and, oh, by the way, Japan is the world's largest capital allocator. They have the largest net international investment position in the world. Kuroda effectively gave investors in Japan, those capital allocators, the green light to go buy duration in the Treasury market, to go buy duration across global sovereign debt markets.
There was an issue. There was a fear there that a revision to Japan's yield curve control policy, i.e. boosting the upper boundary of that range, would ultimately put incremental pressure on global sovereign debt markets on the long end of those sovereign debt curves globally.
Well, now you can check that box and say, hey, that incremental duration risk is not going to come to fruition, at least not over the near term. And we could sort of rest assured that, hey, look, at the bare minimum, the BOJ is going to have our backs as it relates to increasing our duration risk.
And so there's been a bid to the Treasury market in the last couple of days, partially as a function of the missing core CPI here in the US-- in the March CPI data. But I would argue that this sort of BOJ development, in my opinion, is actually the bigger story here.
MAGGIE LAKE: Yeah, and that's so interesting and so important to keep in mind. Because at the face of it-- so yeah, there was a miss, and I want to dig into that inflation. There was a-- we call it a miss. It was a little bit lighter than expected in an era where the inflation numbers have been like blowing past forecasts.
It seemed like a miss or a positive surprise in terms of the pace of inflation. We've got a big print on PPI. Again, today, we saw UK inflation at 30-year highs. So-- and yet, you see treasuries come off a little bit, and you see a big bid to stocks.
So you're rightly pointing out that there are a lot of maybe behind-the-scenes currents that are influencing these moves. So let's go over some of the numbers, for those of who may be listening and driving and not plugged into your screens. NASDAQ up-- it probably ended up 2%, but it was well above 2% into the close, kind of rallying into the close.
S&P and DAO-- strong gains. 10-year Treasury edging back down. VIX also edging back down. What did you make of the market action? You just mentioned you think Japanese is at play, but what do you think the psychology is around these inflation numbers right now, Darius?
DARIUS DALE: Yeah, so let me take a step back and sort of explain the market action, right? Right now, we're still in a regime where we're comfortably above 5% headline inflation. That tends to be, at least empirically speaking, the demarcation line between stocks and bonds having a positive correlation.
So any positive bid-- and it works in both directions, right? If bonds go down, stocks have been going down with them. Bonds go up, stocks have gone up with them. And obviously, you get the added kicker-- when you're talking about NASDAQ-type exposures or crypto-type exposures, those will have a higher beta to a decline in bond yields.
And so that's sort of what, in my opinion, what's really drove in the market today-- is the market sort of reassessing this risk that the Bank of Japan was going to get incrementally tighter and they obviously did not. And so there's the markets can celebrate that for a while.
Going back to the inflation data, there's a lot to unpack in the inflation data, because for a while there, at least initially on the response yesterday-- I'm talking about the March CPI data, because the CPI data sort of just tell us what we already know. For a while there, there was a very positive market response to the print, right?
We saw the slowdown-- or not the-- yeah, the deceleration of core CPI. It came in light, relative to consensus expectations, and that was a very positively-- that was a celebrated influence. And obviously, we had the big reversal intraday yesterday and sold off into the close, and that was obviously, in our opinion, driven by sort of-- once an analyst like myself and other investors got a chance to really dig into the data, it was very clear-- particularly when some of the regional Fed inflation metrics kind of came out and started to trickle out, it was very clear that this narrative of peak inflation is a little bit too soon.
And the reason I say that-- you look at headline CPI on a three-month, seasonally adjusted annualized basis, we're looking at that from impulse perspective. Because I think the headline is not necessarily telling the right story. The story that matters is what the Fed is going to do.
And if you look at it from a three-month SAR basis, in terms of impulse, the impulse is still decidedly higher than the year-over-year time series. We're about 10.8% on three month SAR, relative to 8.5% on year-over-year headline CPI.
So that's an issue. But more importantly, when you look at things that I think are more relevant for the Fed, when you look at the CPI time series and everything that's in it, median CPI-- the three-month SAR there accelerated to 6.4%. That's an all-time high, and it's about 200 basis points faster than the actual year-over-year.
So we're continuing to build inflation momentum in median CPI. This is everything-- the median of all the different components of the CPI basket. And then, lastly, sticky CPI, which would actually have the Fed a little bit more concerned as well--