ANDREAS STENO LARSEN: Hey guys, and welcome to the Real Vision Daily Briefing, I'm Andreas Steno from Real Vision, sending to you live the 22nd of August, on another day of absolute mayhem in energy markets. In the light of that ongoing turbulence in energy markets, we've decided to ask the question today, when will the energy crisis end? And I have invited the global markets editor from Real Vision, Weston Nakamura, to join me for a discussion on that exact topic. Weston, it's good to see you again. How are you?
WESTON NAKAMURA: Great to see you, Andreas. How are you?
ANDREAS STENO LARSEN: Good. We've basically got most of the energy importing world represented here today, Weston, with Japan and Europe being in the same virtual room. But before we get to that discussion on the energy crisis, let's just have a brief top-down assessment of the market moves we've seen across assets today. It seems as if energy is in the driver's seat.
WESTON NAKAMURA: Yeah, certainly. Especially in your neck of the woods with Germany hitting 700 on that level on power. You want to get into that?
ANDREAS STENO LARSEN: Yeah, crazy move. I think we can bring up a chart on France, actually, Germany is also very interesting from an electricity perspective. But if you bring up the chart, Brian, on the French pricing of electricity into the winter, we basically reached new levels in the pricing of the December contract for electricity in France at above 2500 Euros per megawatt hour for the peak load, so basically, the hours during the day where you use the most electricity.
Quite an interesting move today in energy across the board as a consequence of this move in electricity and natural gas. Weston, we've seen spill over to the FX space. And I think last time the two of us debated on Real Vision Daily Briefing, we had a discussion on whether the Euro was a good shot. I think we agreed at the time that it was a good short, but the debate was against which currency to short it. What's your take right now given what we see in European energy markets?
WESTON NAKAMURA: Yeah, actually, so the last time, it was just you and I, this was the day before July FOMC, so heading into July FOMC. And it wasn't actually a USD or a Euro short, what we were doing was talking about JPY long given the very crowded short JPY position.
And if there would be any hint of I don't want to say dovish news, but slightly less hawkishness coming out of-- perceived come out of the FOMC, you may see an enormous amount of profit taking and closing of this position of a policy divergence between the US and Japan, which is what the long USD/JPY trade was. But what I was saying then was instead of shorting USD/JPY, you go long the yen against the Euro, so you short EUR/JPY.
And the three were several reasons for it, the bigger fundamental one being that it was my belief at the time that with the ECB having just rolled out their yield spread control program, they're looking more so like the Bank of Japan rather than they are the Fed, even with ECB's frontloaded rate hike should the market realize that. The risk that you had actually brought up at that time was-- for being long the yen was this very energy crisis that was hitting globally.
And if energy prices continue to skyrocket, and Japan is a massive importer of not just energy, but also raw materials, and basically everything. And so that can be a huge downside risk for JPY if you're going to be long, but the reason that I was saying that's why you short, the Euro against the yen is because by shorting the Euro against the yen, it's my belief that-- Japan definitely has issues in terms of procuring energy imports.
However, they're not as bad, not nearly as bad as Europe. It's very hard for me to imagine a scenario going into at least the second half of this year, in which in terms of specifically that front, that energy import risk, that whatever headwinds Japan might be facing on that front, Europe has to be worse. Therefore, a short EUR/JPY trade almost has that built in hedge regarding that specific risk parameter.
That's why you short EUR/JPY and also because, Brian, if you bring up chart one, you'll see that this was intraday. Today, we've hit parity again for Euro/USD. Very, very pesky to really break below that. It was like a second or third time this year that it attempted to and it's not really meaningfully doing so. However, against the yen, there's plenty of error underneath there and so you don't really have to deal with this very stubborn Euro/USD parity floor, nor do you have to necessarily deal with the USD strain that will bring dollar/yen higher if you're trying to go long the yen. So basically, you just take the dollar out of the equation and you're left with shorting the Euro against a very oversold yen, and that's the trade.
The bottom part of that, by the way, is where you and I had made that discussion, had that discussion about going into the FOMC about shorting Euro/JPY or being long JPY and it's been the better of the shorts of those three pairs.
ANDREAS STENO LARSEN: It definitely has. I made a threat earlier today on Twitter, saying that Euro versus dollar hits 0.95, then I will open and own the Fed's account, so fingers crossed that we don't reach that point now. Because I don't think anyone would like that scenario. But by the end of the day, let's get back to the discussion on the actual stuff.
WESTON NAKAMURA: I just need to, because I was thinking about this direct before we came on, and your threat that you put out there. But A, please, for the love of God, Europe, get your act together so that this doesn't happen, and B, maybe-- I don't know if this is like an American term or whatever, but when people say they lost their shirts shorting the Euro, I don't think that this is exactly what they were talking about. I just want to make that clear in case you weren't clear. But yes, let's move on. And let's hope that the Euro doesn't break too far below parity.
ANDREAS STENO LARSEN: Yeah. One reason why I actually think that the Euro will gain a little bit of support over the coming months or so in terms of the move against the dollar is that we actually see a very decent building of gas storages in Europe right now. And I think, Brian, you can bring up a chart on the running flow of natural gas into Germany right now. And I think it's quite underreported that Germany's gas flow is actually very, very strong right now.
They're just paying a lot for the gas, but the flow is strong in sharp contrast to the general opinion. I think the issue in terms of capacity has been more or less salt by now, but at a very, very high cost. That's the next thing to deal with for politicians, how to ensure that households and corporates will not face the entire cost. And if we get to that stage, I actually think that the Euro could stage a comeback. But right now, the market is certainly thinking otherwise.
But Weston, if we look broadly across the FX space, then I couldn't bring up a chart also on the positioning, you've mentioned the positioning in yen already. And if we look at the most recent data print for the CFTC futures, then we can see that there is a negative net open interest in JPY at around 22% of the open interest, so basically still a big short in the Japanese yen. Do you think the yen will have legs given this positioning still?
WESTON NAKAMURA: The short yen, so long USD/JPY?
ANDREAS STENO LARSEN: No, the long yen story, given that the market is short.
WESTON NAKAMURA: The long yen. Yeah. It depends. Again, so you're going to Jackson Hole, I'm assuming that Mr. Powell and friends, they cannot at all seem slightly less hawkish. I'm not going to use the term dovish, but just like slightly less hawkish. Otherwise, what the hell are they doing there?
So you're probably going to see against the dollar, at least, yen downside, at least going into that in expectations, if not coming out of that having expectations that were for a more dovish pivot language to come out. Either way, though, you're probably going to see going into it or coming right out of it in the very near term in the immediate, this week, you're probably going to see yen to drop further or dollar/yen to rise further.
But again, this is why I just don't want to touch the dollar at all. This is why shorting the Euro/yen cross rate, you can have a situation in which the chart you were showing, this previous chart you were showing with European energy, that's against the Euro/USD play. And again, you could just remove those sorts of factors from it and you can just strictly look at almost policy divergence between BOJ and ECB perceived policy divergence without this parity psychological floor.
It's not a psychological floor, it's an actual floor as we can see. And these other factors as well. And again, the risk to Japan is going to be less than it is for Europe. And so therefore shorting the Euro against the yen could be a way to sidestep all of that.
ANDREAS STENO LARSEN: Yeah, I think that trade makes a ton of sense still. Also, given that the positioning is still very heavy in the US dollar on the long side, at least, if we watch the CFTC data. I know that you have a point to make in terms of the price action in the Chinese renminbi as well, Weston, because it seems as if it is an important gauge for risk assessment overall.
WESTON NAKAMURA: Yeah. I'd say over the last about two weeks or so, the focus really should have been for global cross asset market participants to keep a very close eye on China. And that is expressed through and reflected via the USD/CNY or CNH cross, CNH is the offshore yuan. But basically, this is the timeline of it. Wednesday, August 10th, PBOC have a quarterly monetary policy report and they were showing that their concern was inflation.
They're being hawkish, that was strange. They're saying there's structural inflation pressures and all that. We can't lower our guards is what they were saying. Therefore, I think it was literally zero, surveyed economists predicted any near-term rate cut by the PBOC. That was the 10th of August.
The following Monday, so last Monday, August 15th, PBOC shocks the markets and the world by cutting one-year MLF rates by 10 basis points, and then seven-day reverse repo rates by 10 basis points. And they did that 15 minutes before a slew of horrendously shitty data that came out. So you had July industrial production was missed by I think it was 3.8% versus 4.5%, retail sales that came in terrible for July. Fixed asset investment, property investment. Youth employment, as you pointed out recently, hitting above 20% and all that. You have Goldman cut China growth forecast for this year for the second time this month, down to 3%.
There's others that are saying China growth is going to be in the 2-handle. And you can't really say that if you're on the sell side, because you're going to be kicked out of China, but those who are on the buy side are looking at 2-handle charts. So all of that's happening. The PBOC does a reverse, like a sudden reverse and they cut rates 15 minutes for all this came out.
And that was a significant moment, because that was the moment that marked the top of this recent risk asset rally, this broad base risk asset rally, be it be SPX or BTC or whatever. Because CNY and risk assets began to correlate to the downside with CNY or the USD/CNY inverse, so you have USD/CNY rising I think the sharpest in I think over a year, NDX was down 2.5% on the week following a 50% rally off of lows.
And when that stuff happens, you just hear general comments like, oh, it's about time, this bull market rally would be over. Nobody ever gives a specific market reason. This is a specific market reason, okay. Friday, last Friday, August 19th, into the weekend. Brian, can you pull up Chart 2, please? I will walk you through exactly what I'm talking about.
9:15am in China, in Hong Kong, China, okay. Basically, 9:15am is 15 minutes for China equity open and that's the time that the PBOC sets its daily yuan fixing. They set it to above 6.8, which is a very psychologically key level. It's a weakest level since September 2020. And when they did that, risk assets-- and that's because of risk assets and the yuan are correlated, BTC took its first of two major intraday drops, I don't know, 90 seconds later. That's reflected in Chart 2.
And then later that day, that same Friday, with about 16 or so minutes left until China and Hong Kong market closed, which is 3am US, 7am London, so this is that window of time is Asia activity predominant, that window of time. That's when you saw huge BTC and risk asset liquidation as there was no meaningful market supportive policy that was coming out of China or perceived to be coming out China and traders are dumping risk before going into the weekend.
Now in the same chart, notice during weekend trading hours, BTC doesn't actually do anything. It's relatively flat. It only moves when traditional markets move, and traditional markets are currently driven by the yuan at the moment. Over the past, since the top of this bear market rally, whatever you want to call it, this risk rally, that was marked by the top of this flip in China and perceived inability for Chinese policymakers to save markets, if not the broader economy and things are just getting worse and worse.
Then yesterday, China cut this one-year LPR by a very meaningless five basis points, cuts five-year LPR, which is targeted at mortgage rates by 15 basis points. So what they're trying to do is they're trying to signal mortgage and property sector concerns and support of that. Bloomberg supporting a $29 billion bailout of the property sector from authorities, but either way, yuan starts breaking down going into this session, taking on equities as USD/CNY is well above the 6.8 handle to a new high hit last on May 15th.
And then Brian, can just pull up this file chart, this Chart 3, I just want to show this USD/CNY year-to-date timeline. Basically, April 28th is a significant day. Before April 28th for multiyear, for maybe like two years old, USD/CNY which is a managed currency that managed every day, they set the fix every day, that was in a very stable plus or minus 2% range or so for years and years.
On April 20 of 2022, the Bank of Japan begins to preannounce consecutive day fixed rate JGB buying operations. In other words, they're offering to buy unlimited JGBs and that leads into them doing that forever, and guaranteeing that forever, instead of on a day-to-day basis. April 20 was the last day that people had any uncertainty of what the BOJ would or would not do in terms of supporting the JGB market. And when that happened, that triggered USD/CNY for a 7.5% surge in the course of about 19 trading days.
Years, it was flat and around 2% plus or minus, 7.5% surge within one month. And then that surge ends on May 15th when the IMF increased the weighting of the yuan in their basket. CNY reverses and stabilizes until now. And then just the past few hours ago, you saw USD/CNY break through that March 15th level. And so now, we're in almost a freefall and we see like USD/CNY up to 7. You're looking at a significant sharp downsides day after day after day coming in for SPX, for the DAX, for Euro Stoxx, for Bitcoin, for the Nikkei, for risk assets, for commodities and all that too. So very important keep an eye on.
ANDREAS STENO LARSEN: Weston, if we assume that the Federal Reserve will remain hawkish at Jackson Hole, and at the same time, we see at least small rate cuts in China, will dollar versus the CNY then turn into the new dollar/yen trade on the policy divergence front?
WESTON NAKAMURA: Yeah, in a way, yeah. But from a foreign policy divergence stance, yes. Except for-- it's a very interesting question, because it's one of them, China is basically doing that but they're doing it directly by managing the currency, whereas the Bank of Japan is doing it indirectly by managing their JGB rate market. I guess it's manipulation by direct form or indirect form. But yeah, I guess in concept, it is, yeah.
ANDREAS STENO LARSEN: In relation to this debate on Asian currencies, I wanted to play a soundbite for you. It's from a discussion between Brent Johnson and Francis Hunt on the Hong Kong dollar peg and whether it's at risk of depegging versus the dollar as a consequence of all the turmoil that we see in both Japanese markets and Chinese markets. Let's listen to the soundbite and get back to that discussion.
BRENT JOHNSON: For people who aren't as familiar watching currencies, and what can potentially happen, we saw the yen earlier this year lose a lot of value, and it did it in a very steady manner over a number of months. That is not possible with a currency peg. You will see the currency peg stay flat for a long time, and then it will just disappear and you will see a massive move very quickly. It was able to happen that way on the yen because there was no currency peg.
But if we're talking about the Hong Kong dollar, the fact that it's sitting right at its band level for a very long time shows that without the band, it would be doing exactly what the yen already did earlier this year. But it's the peg that keeps it flat. Anyway, back to you.
FRANCIS HUNT: No, I love that. And I refer to it as the damn wall breaking scenario. You either let a river run and it trickles on as the yen did or you dam it up and you hold it artificially at a level. But at the end of the day, it's going to the sea and it goes a whole bunch faster, a whole bunch quicker when you do the dam wall because the dam wall breaks and then the pressure is too much. So it's a very, very valid point.
And I would further to add to Brent's point saying the longer they disproportionately hold a mispriced and they don't let market's pricing mechanisms work, the greater the subsequent move. Now don't forget, this has been a 40-year peg, but the pressure really is coming on now. So it just becomes a bigger-- they store up a bigger move because they'll have less resources. There'll be leaner, and there'll be complete capitulation.
ANDREAS STENO LARSEN: The entire discussion between Brent Johnson and Francis Hunt is available for essential subscribers to the Real Vision platform