Flash crash, melt up or nothing at all?

About a month ago, I wrote about this period coming up at the end of this week with all its uncertainties. Here we are then, Golden Week combined with the passage of Emperors, the start of the “Reiwa” era, begins on Friday night.

There are a few things to consider running up to this 10 days period:
First did we have already some comments from MOF and BOJ officials saying they would keep an eye on things and would stand ready to intervene if the markets would go wild during the holidays. In that respect I would expect, all else equal, for BOJ to make a comment in that sense during the presser after their monetary policy meeting on Thursday. In need of, even being officially closed, they do have London, Nyk branches each of them and a list of intervention banks they can order any time to counter flash moves if they would occur. MOF( who decides upon FX interventions) could order BOJ to leave orders with their branches pretty close to the market, let’s say within 1-2% to counter what they would consider “speculative” flows.

Next Abe, Motegi, Aso and crew are traveling this week, to Europe and the US. Abe will be meeting with Trump, Motegi with Lighthizer and Aso with Mnuchin. The first 2 have already decided not to mention FX. I don’t see a problem with that from Abe’s side but let’s see if HRO complies to the agreement.
The next couple will probably avoid it as well having more irons in the fire with cars and agricultural considerations.
Leaves us with Aso and Mnuchin. Aso, being Abe’s best buddy, will be prepared with the usual lines saying Japan needs to beat deflation, policy not intended to move FX and that Japan’s government is working hard to keep the ageing economy underpinned. His lines last night about not wanting to go into MMT and especially BOJ and the government making mistakes in their fight against deflation during current Emperor’s era( Heisei) did create a wobble for USDJPY but they seem to have been taken out of context by the algo’s, not taking into account he was more referring to the 1990-2010 period than the actual Abe’s arrows. Question is on FX, will Mnuchin start to bang on about it? It is after all an integral part of US’ trade negotiations to try and force counterparts to not to weaken their currencies. Let’s see.

Another, strange one, is that some Japanese securities firms considered (I don’t know if it’s a fact now) to only consider accepting sells order for foreign securities during the holidays. My guess is that this would be understood to mean they allow trades to “reduce risk” only, and not to open fresh risk and purchases to avoid the cross border payment risk outbound of Japan as all internal payment systems will be turned off.

Also don’t forget the Emperor’s change. Not that the Emperor will talk about monetary policy or the JPY… But there will be a number of speeches by the old, new one and officials from all boards, don’t rule out politically tinted declarations. An Emperor change in Japan is a big thing for the whole country.

The final moving piece lies with the USD. We are in full earnings season, we have the Treasury dept report out on Thursday, GDP on Friday and last but not least next week’s FOMC. If at any time liquidity would become an issue due to the wind down into and during the Japanese holidays, we will need to be prepared to see USDJPY start to finally swing a bit more than what we’re getting at present in this low FX volatility environment for the majors. The USDJPY is even less of a mover these days, trapped between investor buying, most Japanese investors increased their unhedged foreign purchases this fiscal year, importer bids, energy prices rising so are their needs, and exporter offers. Add long gamma option players to this.

We had a perfect cocktail for virtual standstill. But that all may be about to change.
First watch out for tomorrow Wednesday night. We’re in for an 11(ELEVEN) day funding/carry jump on USDJPY. Unlike other years, there won’t be payment day during Golden Week. That already may have an effect ahead and after the Wednesday close. Long JPY players may not be ready to pay for it and smart (or thinking to be) cookies may try to take advantage of it.

Then, the last GOTOBI fixing of the month on Thursday could see increased corporate interest as they will miss out on one in the first week of May. Looking at the aforementioned increase in oil, this may see more USDJPY demand, if they didn’t already prepare for it. At the same time, come end of the week, could the exporters be tempted to hedge a bit more in case they haven’t been paid out of enough of their offers 112 and above.

In addition, since there’s is uncertainty on how value dates and limits in trading to often the same one will affect positions during the “shut down”, we may get a rush for the exit on JPY positions.

Throw the BOJ in the midst of it, we can expect increased volatility from tomorrow imho. Which brings me to liquidity…
As I was writing back then, checking with brokers, they didn’t seem to be overly worried, just saying that if liquidity is not sufficient, prices would widen. Right, that means they are ready to make us pay the price for it should the shit hit the fan. I just hope we’ll be able to get out of any positions at a decent rate come Monday. Although I’m not taking this as a base case, it is a real risk in my playbook, which I will respect and prepare for the best I can by keeping the positions under tight control at all times and constantly monitor the liquidity and spreads available.

Therefor I will for instance avoid trading the dead hours 9PM to 12AM GMT or a flash crash unless forced to. This being said, I am a trade after all, Ryan had a piece on it last week, I am preparing some really far away orders to try to take advantage of flash crash or even melt up, which is something most of us, even seasoned traders, have not really experienced but is not totally to rule out, we just don’t know do we.
Mrs Watanabe has been rinsed twice out of her investment positions to downside in the past year but being, and rightfully so, worried about what’s to come (none of us have experience with a 10 day payments closure in a major currency) most of the players will have prepared for an equal risk imo, which makes me think positions will be light and especially speculative short JPY positions may be reduced come Friday. I’m wondering if players are not just solely focused on the downside on JPY pairs, leaving the door actually more open to the upside, since Japan’s monetary officialdom will be standing rather ready to intervene in case JPY strengthens to much, risking to derail the inflation efforts. One to think about in my opinion.

As a matter of fact I have a, albeit small, long USDJPY position right now(111.90), planning to keep it running into the BOJ for a starter, after that I’ll decide. It’s not something that will hurt the account and I stand ready to react in case of deeper JPY short covering post Kuroda. For the holiday period if there would be some shocks, providing trading limits/ multiple repeats of value dates and spreads not blocking the trading, I am prepared to buy USDJPY at 108 and 105, or if it would be originated by a another cross, a move which would be roughly 5% or more. I’m convinced MOF/BOJ stand ready at lower levels. On the other side of the spectrum, I don’t see much to warrant a USDJPY above 115/116, where I would happily take profit if my longs remain in place and especially not if a melt up would take it into the 118.50/120 zone, where I’d turn short in current market.

So far for disaster preparations. Since the main market players will (or should) have gone through similar thought process, it should diminish the risk of a major accident imo. Where I do expect increased volatility due to the absence of the Japanese players and corporates, it may all stay within reasonable boundaries and depend on CB’s data, yields and “trade”. We’ll be monitoring each side of the 110.80 and 112.60/70 and more specifically today 111.60 and 112.20 as the USD looks perky with earnings still going good in the US and DXY banging on the 97.40 door again. On a side note: CHF has taken over on risk these days. It may be a sign players have already shifted their emphasis partially away from JPY.

Updates to follow as the festivities will be in full swing.

Safe travels and happy hunting!

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