Recap : $¥ Downside


A shout out for the blog of a friend:

So the BoJ did not ease, but also dashed hopes of any easing in the near future. For a central bank focusing on inflation expectations, this was not unreasonable. The 2018 inflation breakeven is at ~2.4%, while the Bloomberg consensus for 2015 inflation has been stable at 1.8% this year:

The problem with this, of course, is that inflation expectations (white below) have lagged the Yen (orange) depreciation move over the past couple years:

As a result, either a sharp drop in USDJPY or an extended period of time may be needed before inflation expectations come down and a BoJ response is triggered. But there are some other considerations that add to the bearish case. First, speculative positioning remains very long. Second, the timetable for the catalysts behind a move higher have been pushed back; not only did the BoJ not introduce additional QE after the VAT hit at the beginning of the month, but US yields (which have historically been positively correlated to higher USDJPY) have failed to break higher. This back drop suggests that a fairly substantial move lower in USDJPY may be imminent.

Separately – If the world continues to burn fossil fuels at the current rate, global warming will rise 2 degrees Celsius by 2036, crossing a threshold that many scientists think will hurt all aspects of human civilization: food, water, health, energy, economy and national security.


  • The BoJ did not ease or suggest it will ease in the near future
  1. Kuroda was confidence that the 2% target will be achieved. He also thought that the output gap has come down substantially.
  2. “I do not think that additional easing is needed for now”, although he added, as usual, that “if needed, I will be ready to adjust the policy”.
  3. Kuroda stated today that the inflation rate ex. consumption tax hike will be between 1.0-1.5% “for some time”, but that it will reach 2% in 2H FY2014 or in FY2015.

Japan Eco Watchers Outlook Survey declined sharply to 34.7 vs 39.5 exp and 40.0 prev. This was the lowest print since the 2011 earthquake, although the VAT hit likely had an impact:

Australia NAB Business Confidence declined to 4 from 7 prev. Conditions ticked to 1 from 0.

Canada Housing Starts dropped to 156.8k in March vs 192k exp and prev.

US leveraged loan volumes soared to $1.1 tril in 2013 and have remained strong into 1Q14 at 50% of total syndicated loans. The boom in these loans has been fed by continued surge of inflows into leveraged loan funds. The genesis of this voracious interest is the search for yield, similar to the strong growth in subprime mortgages in 2006-2007. Quality of leveraged loans is weakening with deterioration in terms and covenants. Credit quality remains good currently, but an interesting shift bears watching – the number of loan downgrades is up sharply and exceeded upgrades in 2013 for the first time since 2009 and downgrades in 1Q14 are already at about double the pace of 2013.

Washington Mon night cautioned Beijing against adopting a new yuan strategy (Washington said it would raise “serious concerns” if China began to weaken the yuan and move away from allowing market-determined exchange rates). Reuters

Upcoming Data:

  • Wed: German trade Balance, USDA Report, Fed Minutes, Australia Employment
  • Thu: BoE, US Jobless Claims
  • Fri: TurkeyCurrent Account, US PPI,
  • Mon: US Retail sales, RBA Minutes
  • Tue: UK CPI, GermanyZEW, US Empire Mfg, CPI, NAHB Survey, NZ CPI, China GDP