Newbie macroeconomic question to anyone knowledgeable

[Zzzz1]

Lol, you did not answer the question at all. I think the term yen appeared once in your entire diatribe of unrelated FOMC policy setting.

It's a feedback loop of correlations. Everything works in relation to the USD. USD relative value is predicated on implied future policy shifts of FOMC. The data or events in the world steer the implied value of USD relative to other macro markets. If FOMC policy is viewed to be 'too' tight to what the economy can handle. The yield curve flattens or inverts. If FOMC policy is viewed 'too' dovish relative to what the economy is doing. Yield curve steepens. If short term rates are raised too quickly it implies that relatively soon the chances are the rate hikes are aborted or reversed. So USD gets hit relative to gold, gold value increases where flight to safety takes place. Some choose bonds instead of gold.


If FOMC is not raising rates, even though economy needs it. Than inflationary pressures build, FOMC plays catch-up, bonds get hit along with gold initially. Only at later stages of a inflationary cycle will the correlation with Gold break. Gold will rise while bonds get decimated. So if USD rises Yen drops, USD becomes a proxy for health of the Global economy since US is a major consumption engine. If world economic health is poor the value of USD continues to drop which implies further Yen creation which is used to purchase risk assets to prevent full deflationary spiral down. Risk assets being anything that can support return on money to filter into economy. Without blatantly handing out billions of dollars to the public, they are handing it out through 'wealth effect'.. bonds, gold, equities are purchased with the endless supply of Yen. If economic health picks up, it means USD value goes up, and everything relative to it drops. Since cheap money or carry isn't their to go into return on risk assets.

Ultimately it's a feedback loop of correlations. Only temporal ordeflow that contradicts the correlation can break it over time.

Economic traction hasn't taken place yet. That is why this Trumpflation was a false start. Bonds and Gold rising while USD collapses. Equities, bonds, gold will continue to get bid up.

Chris

 

[Zzzz1]

BoJ's easing program has nothing whatsoever to do with the FOMC nor with the US dollar, not even with trade balances nor trade surplus.

It has to do with the fact that the Japanese Central Bank was basically politicized and instrumentalized to pump tons of yen into the domestic economy without the government having to lean too far out the window (pretty much a direct financing of the government) . It also has to do with the former fight against domestic deflation. The Japanese QE program has purely domestic reasons and is not related to the US, trade, or the FOMC at all.

Of course it has implications for international markets but the origin and the reasoning behind the entire program are home based.

An entirely different question is the reason for the correlation between dollar-yen and US yields. But let's first tackle one issue before mixing it all up

I read this article today after a friend linked it to me: http://www.zerohedge.com/news/2017-04-17/were-all-yen-traders-now#comments

"
The Japanese exchange rate is being influenced by massive distortions with their unprecedented quantitative easing programs. And that’s the rub. The Yen is not ‘tracking’ but instead ‘creating’ these moves in the U.S. capital markets.

The Bank of Japan’s quantitative easing program is without precedent in the developed economic world. It is easy to forget the magnitude of their purchases. To remind you, here is a chart of the Fed, ECB and BoJ’s balance sheet as a percent of GDP:"


What does that mean? That the japanese government is buying or selling US bonds? My little understanding is that when a country does quantitative easing, it buys its own country's bonds. So the japanese would buy japanese bonds, not US bonds, in order to stimulate their economy. Where does the similarity of the jpy to the 5 year US bond come from?

 

[victorycountry]

BoJ's easing program has nothing whatsoever to do with the FOMC nor with the US dollar, not even with trade balances nor trade surplus.

It has to do with the fact that the Japanese Central Bank was basically politicized and instrumentalized to pump tons of yen into the domestic economy without the government having to lean too far out the window (pretty much a direct financing of the government) . It also has to do with the former fight against domestic deflation. The Japanese QE program has purely domestic reasons and is not related to the US, trade, or the FOMC at all.

Of course it has implications for international markets but the origin and the reasoning behind the entire program are home based.

An entirely different question is the reason for the correlation between dollar-yen and US yields. But let's first tackle one issue before mixing it all up

I agree with you ZZZ. The main objectives of QE is to stimulate the domestic economy although the end results could be improved trade balance.

ZZZ, do you do spread trading (buy low and sell high using one currency pair)? or pairs trading (using multiple currency pairs) ? or both? I guess you must be doing both. But is that the main strategy of hedge fund? Because we all know pairs trading is very famous hedge fund strategy

 

[Zzzz1]

I don't trade pairs or spreads. Despite describing my trading approach as being quantitative in nature I do not believe in correlations between assets almost at all (with very few exceptions). If you study finance history almost all spectacular blowups are related to people having misjudged correlations. Correlations in financial markets are dynamic, sometimes change even randomly.

I agree with you ZZZ. The main objectives of QE is to stimulate the domestic economy although the end results could be improved trade balance.

ZZZ, do you do spread trading (buy low and sell high using one currency pair)? or pairs trading (using multiple currency pairs) ? or both? I guess you must be doing both. But is that the main strategy of hedge fund? Because we all know pairs trading is very famous hedge fund strategy

 

[victorycountry]

I don't trade pairs or spreads. Despite describing my trading approach as being quantitative in nature I do not believe in correlations between assets almost at all (with very few exceptions). If you study finance history almost all spectacular blowups are related to people having misjudged correlations. Correlations in financial markets are dynamic, sometimes change even randomly.

Yes, In the old days. If a trader blows up then, it's their fault, they simply did not have skills but they are too egotistical to admit that.
I don't look at correlation at all. Prices are not fixed, they float. It's a basic fact but 99% traders repeat the same mistake over and over and believe one day they can hit the jackpot.

So what's the name/style of the strategy you use if you don't mind? I am just curious. Because when I watched documentaries on algo traders, they said they use pairs trading strategy.

 

[Zzzz1]

Well, its a discussion for an other thread. First of all, terms have to be clearly defined. Hft, algorithmic trading, systematized trading, quant trading,...all mean different things to different people. In a nutshell I trade low latency strategies that are based on order book dynamics and I trade volatility base approaches for most discretionary trades. But that does not tell you anything, hence my earlier point, unless one really talks about very detailed, well defined, strategy related issues there is hardly a point to discuss it because it does not add value.

Yes, In the old days. If a trader blows up then, it's their fault, they simply did not have skills but they are too egotistical to admit that.
I don't look at correlation at all. Prices are not fixed, they float. It's a basic fact but 99% traders repeat the same mistake over and over and believe one day they can hit the jackpot.

So what's the name/style of the strategy you use if you don't mind? I am just curious. Because when I watched documentaries on algo traders, they said they use pairs trading strategy.

 

[victorycountry]

Well, its a discussion for an other thread. First of all, terms have to be clearly defined. Hft, algorithmic trading, systematized trading, quant trading,...all mean different things to different people. In a nutshell I trade low latency strategies that are based on order book dynamics and I trade volatility base approaches for most discretionary trades. But that does not tell you anything, hence my earlier point, unless one really talks about very detailed, well defined, strategy related issues there is hardly a point to discuss it because it does not add value.

I have seen what you have mentioned on one of algo trader documentary.
I also look at probabilities but I use option's implied volatility to estimate whether the current price could appreciate (depreciate) above (below) a strike price. So I kinda understand what you're saying. I also look at Moving average. People thinking is limited so they can't think out of the box unless some expert points it out. Moving average shouldn't be limited to below 300 in 1 minute interval. I also look at order flow as it has predictive power upto 1 hour. I use 6.2 billion transaction data to explore the price efficiency of financial markets and I find this concept of law of one price - or price efficiency is very important and some methodologies developed by well known academia gives me a good insight into how market system "should" work.

Thanks ZZZ, you have given me enough info that I wanted to know

 

[Zzzz1]

glad it helped, though I do not think I have given anything "away". Everyone has to find their edge by themselves and the edge is highly a function of one's utility which in turn is a function of risk aversion, account balance, and a number other variables. Good luck.

I have seen what you have mentioned on one of algo trader documentary.
I also look at probabilities but I use option's implied volatility to estimate whether the current price could appreciate (depreciate) above (below) a strike price. So I kinda understand what you're saying. I also look at Moving average. People thinking is limited so they can't think out of the box unless some expert points it out. Moving average shouldn't be limited to below 300 in 1 minute interval. I also look at order flow as it has predictive power upto 1 hour. I use 6.2 billion transaction data to explore the price efficiency of financial markets and I find this concept of law of one price - or price efficiency is very important and some methodologies developed by well known academia gives me a good insight into how market system "should" work.

Thanks ZZZ, you have given me enough info that I wanted to know

 

[Pluralsight]

No it's mislabeled .. axis on right shows usd/jpy

It does show the USDJPY numbers, but look at a USDJPY chart and a 5 year note chart, they are almost opposite. Now if you put the 6j future (which is JPYUSD) you'll see the same movements.

 

[Pluralsight]

BoJ's easing program has nothing whatsoever to do with the FOMC nor with the US dollar, not even with trade balances nor trade surplus.

It has to do with the fact that the Japanese Central Bank was basically politicized and instrumentalized to pump tons of yen into the domestic economy without the government having to lean too far out the window (pretty much a direct financing of the government) . It also has to do with the former fight against domestic deflation. The Japanese QE program has purely domestic reasons and is not related to the US, trade, or the FOMC at all.

Of course it has implications for international markets but the origin and the reasoning behind the entire program are home based.

An entirely different question is the reason for the correlation between dollar-yen and US yields. But let's first tackle one issue before mixing it all up

This was my understanding as well, that QE would generally be a domestic thing. So this is why I asked why this correlation appears. The article's author doesn't believe it is coincidental, but I can't understand the point he wants to get across either.