'I'm absolutely flying now. The ball looked like a beachball travelling in slow motion to me and the Worcester bowlers are in bits having worked so hard to get us to nine down only for Tuffnell to thwart them.'
That's a line from Phil Tuffnell's (the famous English cricketer/Question of Sport jester) biography.
I played cricket and was pretty decent at schoolboy and club level.
Although kinda short, I had a fair amount of pace.
Not so handy with the bat, mind you.
But I've had a few good knocks, and I can definitely attest to the beach ball effect...
See, that's when you are so well concentrated that everything is clear...
Your movement is perfect along the batting crease...
You anticipate what the bowler is going to do...
You see the red leather ball as being half a meter wide and brightly coloured.
It's perfect and you end up being unplayable.
Trading is very much the same.
Sometimes you get that one idea per year where EVERYTHING makes sense.
This year, that has been selling AUDJPY.
A few years ago, it was being long EURUSD.
Now, Macrodesiacs who have been here since the beginning know that our second trade, after the absolute failure that was selling the ES back in February, has been to sell AUDJPY, and we have been doing so ever since.
We are currently at a very key point in the trade life cycle...
See, in the last few days, there has been speculation that Chinese listings on US exchanges will be blocked...
The Treasury did come out and deny this, but the denial was a day late and of course, there is rarely smoke without fire.
This could be a large spark if true.
When AUDJPY has behaved like it is in the chart above, we have entered recession shortly after.
Now, let's say that the US is going to ban and/or remove Chinese listings from its exchanges...
What would that mean for each firm's corporate debt?
See, if liquidity in equity dries up, it's likely that default risk would increase dramatically.
That would lead to a steep rise in corporate bond yields...
And remember the correlation between high yield debt and AUDJPY...
There has been a divergence of late between HYG (orange) and AUDJPY...
My thoughts are that this could be a catalyst if the idea of delisting/blocking Chinese firms gains traction.
But what else do we have to support our view of continuing to sell AUDJPY?
CapEx (capital expenditure) is now in negative territory in the US.
CapEx is what firms spend on reinvesting...
Machinery, buildings, technology...
And this is now receding - which makes sense since we have been seeing reductions in earnings across the board for a long time now.
So we have two data points that have broken key numbers indicating some more downside.
But what else?
CapEx is more 'elastic' than Opex (operational expenditure)...
That is, if conditions deteriorate, it's likely that Capex will be the first expense base to be lessened (as we are seeing from Cristophe's tweet).
But, what happens when a firm decides that Opex is now too costly?
See, Capex is more elastic because there are less contractual elements perhaps...
For example, it's relatively easy to not make a decision to increase investment (or in fact decrease it), but to make mass redundancies?
Much harder.
But there will be a point where this is likely to happen, and we have already seen it in the car industry throughout this year, with workers being laid of left right and centre.
If we take a glance at the chart, we can see that AUDJPY is very sensitive to unemployment changes - I'd argue though that this is more of a product of dampened output and GDP expectations being revised down heavily.
But, if you aren't in this trade yet, or are looking to add risk, this price is the time to do it at.
Risk at 75.00.
Remember, this trade is the beachball trade for 2019, and we aren't done yet!
Comment
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Trade stopped but not a worry - the ideas behind it still hold true.