AUDJPY's Relentless Rise Continues Pulling SPX Higher
Following up from last week, AUD strength vs both JPY and USD continues to pull risk assets - namely DM equities higher, and seems like the path of least resistance is to continue rallying. AUDJPY has broken through its Dec '19 highs after surging well over +20% from March bottom. AUD is up +5% in the last 5 days since my previous post alone.
Why the seemingly unstoppable AUD strength?
1) Australia reported its 4th consecutive quarter of current account surplus on June 2, coming in at record +$8.4bn - and this is a legitimate trade surplus driven by iron ore exports, not just a narrowing of imports to support AUD demand.
2) CFTC positioning data shows levered funds continuing to increase their shorts on AUD, and subsequently getting their faces ripped off to buy cover. Speculators continue to short AUD, with positioning remaining net short and setting up for further squeeze ahead.
3) My working theory- AUDJPY was a go-to carry trade that funded a lot of the subprime garbage assets leading up to 2008 (after which, AUDJPY had a MASSIVELY sharp unwind, slamming AUD and strengthening the yen into the 70s vs USD)- this was largely due to the AU-JGB yield spread. Fast forward to Sept 2016- BOJ becomes the first major CB to implement Yield Curve Control, ¥ yielding leg of the rate spread effectively pinned down at around 0%, AUDJPY carry trade re-emerged with levered up retail. unwind, as RBA started slashing rates to record lows and narrowing the JGB-Australia yield spread.
However, in response to COVID, RBA became the second major CB to implement its own YCC, albeit slightly different mechanics from BOJ's YCC. Nonetheless, you now have BOTH sides of AUDJPY artificially manipulated in a range- and I believe that the perception of both BOJ and RBA to hold respective yields steady, carry traders are now piling back in with max leverage to collect their dual central bank manipulated spread. On top of that, there's now been recent chatter of the Fed to implement YCC as well- which now "stabilizes" AUD vs both yen and dollar yields. And thus, AUD soars, risk assets soar.
This is (in part) why Nasdaq can rally to an all time record high in conjunction with historically horrible macro data in the real economy- because AUD doesn't care about US initial jobless claims or nonfarm payrolls (surprise to the downside or up). Nor does it care about COVID case numbers, or social unrest and protests.
So for the time being, as long as real world economic gravity is deemed irrelevant (which it clearly has), then it seems SPX, as ridiculous as it's been, has more upside catching up to do.
That said, note that AUD futures implied vol has spiked in the past week for one of the sharpest upward vol moves seen in years- could be a warning sign, or just "meaningless" hedging activity as Australia and China escalate their tensions.
Why the seemingly unstoppable AUD strength?
1) Australia reported its 4th consecutive quarter of current account surplus on June 2, coming in at record +$8.4bn - and this is a legitimate trade surplus driven by iron ore exports, not just a narrowing of imports to support AUD demand.
2) CFTC positioning data shows levered funds continuing to increase their shorts on AUD, and subsequently getting their faces ripped off to buy cover. Speculators continue to short AUD, with positioning remaining net short and setting up for further squeeze ahead.
3) My working theory- AUDJPY was a go-to carry trade that funded a lot of the subprime garbage assets leading up to 2008 (after which, AUDJPY had a MASSIVELY sharp unwind, slamming AUD and strengthening the yen into the 70s vs USD)- this was largely due to the AU-JGB yield spread. Fast forward to Sept 2016- BOJ becomes the first major CB to implement Yield Curve Control, ¥ yielding leg of the rate spread effectively pinned down at around 0%, AUDJPY carry trade re-emerged with levered up retail. unwind, as RBA started slashing rates to record lows and narrowing the JGB-Australia yield spread.
However, in response to COVID, RBA became the second major CB to implement its own YCC, albeit slightly different mechanics from BOJ's YCC. Nonetheless, you now have BOTH sides of AUDJPY artificially manipulated in a range- and I believe that the perception of both BOJ and RBA to hold respective yields steady, carry traders are now piling back in with max leverage to collect their dual central bank manipulated spread. On top of that, there's now been recent chatter of the Fed to implement YCC as well- which now "stabilizes" AUD vs both yen and dollar yields. And thus, AUD soars, risk assets soar.
This is (in part) why Nasdaq can rally to an all time record high in conjunction with historically horrible macro data in the real economy- because AUD doesn't care about US initial jobless claims or nonfarm payrolls (surprise to the downside or up). Nor does it care about COVID case numbers, or social unrest and protests.
So for the time being, as long as real world economic gravity is deemed irrelevant (which it clearly has), then it seems SPX, as ridiculous as it's been, has more upside catching up to do.
That said, note that AUD futures implied vol has spiked in the past week for one of the sharpest upward vol moves seen in years- could be a warning sign, or just "meaningless" hedging activity as Australia and China escalate their tensions.
