The Swirl of Pain

BIG MESS - There's a whole lot going on out there as we wind down this remarkable 2017 year. Why has 2017 been so remarkable? Well..I'm still not that old of a fella but in my years, I've never seen a situation where one could actually make a compelling case for a positive correlation between uncertainty and appetite for risk (as a junior associate at a law firm). At the moment, we are sitting just off record highs in the stock market, while staring at less than impressive US tax reform, a possible US government shutdown due to a massive debt crisis, the UK trying to figure out how life will be after voting to leave the EU, political drama across Europe, worries over troubles in an overheated China, geopolitical tension and terror and a White House investigation determined to bring down the President. Oh ya...all of that with the added bonus of a dried up well of monetary policy accommodation. But no problems here! Nothing to see here!

YAWN - So please forgive me for belaboring the point, but it's an important one. This takes us back to our USDJPY short position. I have loved, loved, loved this play as it plays right into all of the things going on right now, with some added protection if things don't exactly play out as I'm thinking. The Yen has already managed to find a nice amount of bids in 2017, despite the ongoing run in stocks. And so, when looking at the traditional correlation, we've definitely seen strong evidence of risk on no longer as supportive of the USDJPY rate as it has been in the past. Sure, the major pair hasn't ignored it, but it definitely is flying along with it as it once did. This is in large part because of all the US Dollar bearishness out there this year. The major shift in attitude amongst some of the larger FX players has not been lost on the Yen. The market is now committed to selling the Buck in anticipation of a ramping up of US administration protectionism and soft Dollar policy into 2018, and this has opened a surge in demand for the major currencies.

YAWN - And so, the trade has already done alright without even having the benefit of risk off flow and a capitulation in a massively bloated stock market. There have been periods of minor weakness in stocks this year, and the interesting thing about that, is that during those periods, the Yen has actually held to its traditional correlation, inclined to move up aggressively as risk comes off. With that said, I continue to look for another big drop in the major pair over the coming weeks. Throw in the technical picture which shows a market in a range after recently rolling over by the top of the range and the USDJPY short just gets that much prettier. Yes...it is has been a tough year and it's true, USDJPY could rip up and take us out. But I can only trade what I see and what I love. If I do that, over time, it generally has a way of working out quite well.