week of the 11th August - BoE/UK economy and the GBP.

A year ago, at the August inflation report, the BoE effectively enacted forward guidance, the GBP had an incredibly choppy session trading from 1.52 to 1.55 in the space of a few hours. I recall it well, as I'd just got back from holiday and was playing Dead Island 2 on one screen, while having twitter and my terminal open on the others. I was glad to stay out of the markets that day as I was getting myself re-acquainted with the markets. This week, we have the BoE once again, and it provides Carney with a perfect opportunity to provide a little more certainty with regard to the 1st rate hike... which is now seen by many in 2014. Renewed CPI projections could be a big mover for the market - a shift higher in the baseline estimate would most certainly bring forward expectations to November time.

UK CPI -Next release for CPI is Aug 19th, however the projections are likely going to be more important.

However, I sit on the camp that sees a 2015 rate hike, one of the key indicators which the BoE have been telling us to watch is Average earnings growth, which they expected to rise to 2.5% by year end (GLWT). Given its persistent weakness, I think the BoE are going to be extremely cautious during the hiking cycle, and will try and put it off as long as possible.

The UK labour market has been incredibly strong, with consistent -30k prints on the claimant count, and the headline rate of unemployment dropping far faster than anyone expected... So we /should/ see a pick-up in wage inflation as we get closer and closer to the NAIRU.

Looking to the markets now, it's clear that the GBP is trading rather weak going into the BoE, presumably with the growing fear that they may confirm (by means of forecasts and language use) a spring 2015 rate hike... With the recent GBP drop, we've also seen STIRs (specifically Short sterling Z4s) rise back into their 2014 range.

Dec '14 Short sterling

For the meantime, the GBP is trading incredibly closely to relative interest rates, most notably the implied yield spread from M5 STIR contracts (Short sterling - Eurodollar)

GBP vs M5 spread

This does make a lot sense too, both central banks are not too far away from hiking cycles, and both economies look to be performing well in my opinion, as such the smallest changes in rate path expectations affect the GBP. Essentially, the US hiking cycle is supposedly to start later but is going to be a tad more aggressive (using 5y5y rates as a rough proxy for terminal rates, we can see US rates are 50+bps higher than UK ones)

UK 5y5y (white) US 5y5y (red)

However, it seems that the GBP is far more sensitive to what is happening on the (very) short end, so essentially for the time being, the GBPUSD is a rather simple bet on the distance between 1st hikes. Which puts the current cable rate equivalent to a 6 month gap... it was closer to 9 months when we traded at 1.72, but we've seen short sterlings weaken, and US rates move higher so we've dropped back to 6 months.

GBPUSD rolling quarterly change vs CESI spread

Also, data has turned against the cable in the past few months, and this will be a defining factor in determining that time gap between hikes, and thus the Cable itself

Morgan Stanley's M1KE (month to the 1st hike) recently went under 12 months for the US... reinforcing the Summer '15 view that many have (tho this will be very data dependent, especially if wage inflation ticks up in the US). However, this all seems pretty fair to me, so right now the GBP is in a wait and see mode regarding the BoE, until then cable will mostly be a USD story.

A trade idea from a few weeks ago was selling GBP vs EUR (about 1/2 way down here)

However, given that I'm winding up my positions for my summer holiday, I've decided to very closely watch the EURGBP next week and look to cover around where we are (preferably 0.8020) 

EURGBP model

Still trading a little cheap to my model, but its close enough now to not mean much, hence my willingness to take profits here.

The EUR should be interesting next week too, in my opinion. We saw a hint of what maybe to come on Friday, with a sizeable short covering rally taking us back above 1.34. However I still think there is scope for a move back closer to 1.35 (which would be ideal to load up with Long term shorts)

Model (white) vs EURUSD (red) and the spread

So we could see a bit of short covering, which would also serve to help the EURGBP pre-BoE, which is what I'm looking for so that I can exit that trade.

For the EUR, we also have German GDP... but something is telling me that I won't give a toss about it (as its Thursday) - however a negative print, which is slowly starting to be expected really does throw a spanner in the works of this eurozone recovery...

We have seen the DAX trim a good thousand points or so since they won the World cup, but finally looks "cheapish" relative to basic valuation methods, but also against US equity. Even though we have seen a pick up in risk (as per my controversial posting of RU CDS' vs. DAX) European assets are looking like good value, especially on the periphery. If the markets really are in some short term risk on/risk off mode, then ceterus paribus, we should see some demand for EUR equity into the beginning of next week especially after the rebound in US equity on Friday, Also given that (on technical metrics) we are oversold and trade at better values this could also serve well to boost the EUR.

relative EU/US equity vs EURUSD

Also, on this "risk off" move in the markets last week... the EURCHF traded down to 1.2130, while 1M vols spiked higher (ok, ok, they are still crazy low, but its quite a move)

EURCHF 1 month ATM vol

Using this spike in vol and lower spot price, I sold 1.2125 puts for expiration at year end... merely 45 points tho.

EMFX was well supported on Friday, and likely to be supported even more if we see the DXY topple over and head to 81. We saw relative implieds volatility spike higher in EM land, but hardly anywhere to be concerned, trading at an average 3.3 vol points higher than a G10 composite on 1month tenors (however mean is 2.5, so only really 0.8vols) I opted on Friday morning to sell some topside USDRUB and USDTRY 25D calls (2.25 on $TRY) 1 month expiration, as we saw quite the spike higher in risk reversals (from 0.5 to almost 2.5 on 1m 25D for USDTRY)

USDTRY 25 delta 1 month risk reversal

However, given the attractiveness to fund EM carry (and DM to some extent) with EURs recently, an EM rally could serve to weigh on the EURUSD, however I don't expect it to be a hugely significant factor.

In other news -- *BREAKING: JEREMYWS' Aaa RATING PLACED ON REVIEW FOR DOWNGRADE AT EDEXCEL

Rumours are strong that we'll see a downgrade to Baa1 on Thursday... but We'll see. 

4th August - RBA rhetoric et cetera

The most exciting week of the summer turned out to be not that exciting... US labour data came in a little light, but still strong. Strong enough for it to not affect the Fed decision making process in my opinion. However, it did successfully manage to crush volatility, and given the calendar for the next week, while there are occasional interesting points, overall it should be rather dull.

However, one of the more interesting releases will be the RBA (tomorrow (5th) morning). Rate movement are highly unlikely, and like the BoC the RBA is in a neutral stance where they see equal chance of the next move being a hike as well as a cut.

(N.B.Using OIS markets, there is around a 15% chance of a rate cut)

However, given the uptick in CPI I see no real chance of a rate cut, yet the RBA are still going to be trying to verbally intervening wrt the AUD.

AUD daily chart

The 0.95 area has been important for the RBA, as they've noticeably picked up their tone when the AUDUSD has traded here, and even though he are 0.9320, we are still close. So I'd fully expect the RBA to mention strongly the AUD. Especially since their neighbours (RBNZ) did so the other week, and the sell of there has been exactly what the RBA has been looking for.

AUD vs OIS rate (next meeting)

Australian data (and Chinese data) has been so-so and looking forward, neither look to be explosive or terrible, so I'm still part of the camp that thinks that the majority of the moves in AUDUSD are going to come from developments in the US rate markets.

AUD vs US 10s (inverted)

More specifically, the area with which the US 10 year note trades will be key... the intr-day correlation isn't huge, but with RBA policy in neutral and data their just chugging along, and sustained move higher in US 10 year yields through the latter half of this year should see the AUDUSD underperform and weaken back towards the 0.90 area.

Much like with the NZD, the AUD is incredibly sensitive to the levels of volatility, and without a meaningful uptick there, its hard to see AUD weakness frankly, as carry traders will look to the AUD and NZD.

AUD vs 3M implieds (inverted)

Overall, I am bearish the AUD going into the second half of the year across the board, as the AUD is more sensitive to the longer end of the yield curve than say the EUR or GBP, and so with rising 10s, the AUD should underperform. Regarding the RBA, there is no doubt they gonna bitch and moan, but the RBNZ had done so everytime, and only recently did the NZD listen. Maybe the same for the AUD.

Next onto a chart that was highlight from @gmactrading on twitter, which shows the EURUSD vs generic 2 year swap spread. Simple enough.

EUR vs 2 year spread

What is interesting about this, is how the relationship is not really "relative" as one would expect, but the actual level of the 2yr spread was key. It had traded at 0 +/- since "whatever it takes" yet the EURUSD continued to rise, as other factors (peripheral spreads, relative equity, current account growth) became more important.

But it is important to note, that now the rate spread has moved lower (currently 28bps wide) the EURUSDs correlation has picked up significantly. And while correlation =/= causation, given the move from 0 -> 28bps coincides with the ECB cutting, I think it is very significant and will be very key into year end.

However, shorter term, it may have over-run a little bit, especially as the DXY has run into resistance... So with the EURUSD market quite short, and running out of momentum - a short squeeze to 1.35 is on the cards for this week.

Finally, This chart I quickly made in Excel shows on the x-axis the Long/short positioning in the FX markets as a composite indicator of desk prop flows / risk reversals / IMM / real money flow etc etc

The Y-axis shows % deviation (overvalued vs undervalued) of the currencies against my own models (of which some can be found here)

My ideas would be to fade the extreme moves in the upper-right and lower-left quadrants. For example, a week ago, the GBP was trading 1.5% above my model and also had positioning value of 40 (where 50 is most extreme long and -50 is short). Shorting with a set-up like that is how I look to trade based upon this, likewise, short term, the EUR is "undervalued" and also the market is short, so there is potential for a short squeeze higher and hence I would buy. However, I need to do some more work on this idea, just thought I'd share what I've got so far (which admittedly is not much).


Not much else going on, expect 10 days 'til judgement day. fuck.

28th - RBNZ and stuff.

Last weeks big event was clearly the RBNZ... hiking the OCR to 3.5% (+25bps), yet in the statement saying how they will pause any further hikes and look to see the impacts of this 100bps hiking cycle. Furthermore, the RBNZ really changed their tone with regard to the NZD... even suggesting intervention (but that worked so well to weaken the NZD every other time....)

Looking at the specific times of each headline, and a tick chart of the NZD during the RBNZ, the major drop came after the stronger language regarding the NZD. However, while this language was a little stronger than usual, its nothing new... Wheeler has bitched and moaned about the strength of the NZD throughout the entire hiking cycle, but only now does the market listen.

Looking ahead, the NZD is sat an important cross road, with a confluence of support at current spot prices

NZD technical chart

There was heavy selling via leveraged players as recorded by Citi, and on the Reuters Matching engine there was 5-10x normal volumes post RBNZ. So clearly a lot of money behind the recent leg lower, however what I am concerned about is how uber-bearish everyone has become all of a sudden. Because, frankly, nothing has really changed. Most people expected a pause in hikes, we got that. Most people expected Wheeler to express concern wrt NZD, we got that (and a little more). So really, to me the continued weakness is on fear of intervention. Something which the RBNZ has done multiple times (last May namely) and failed.

The overall environment is still very carry positive, being gauged two ways, firstly :

NZD (red) vs G10 implied volatilty (white)

The relationship between the NZD and G10 implied volatility is still strong, albeit a marginal divergence in the last week. Without implied volatility ticking up meaningfully (scale inverted btw) I struggle to see *too* much downside in the NZD, as managers will look to pick up carry (with NZD offering better rates than some EM).

Another way to look at this, is Carry/Vol:

NZD (red) vs Carry/vol (white) 

I'm looking at 1Y swap spreads over G10 implieds here, and its a good theoretical (and practical) reason as to why the NZD is where it is... However, since the RBNZ the two have diverged substantially, because carry didn't exactly drop much (2yr swaps dropped what, 4bps) and implied volatility certainly hasn't picked up.

NZ 90-day bank bill 3rd contact out (continuous, currently M5s)

NZD 90-day bank bill curve last week (purple) and spot (yellow)

Here we can gauge the impact of the RBNZ on the short end rates. With the NZ M5s dropping the odd tick, but still much, much higher. Secondly the futures curve dropped the odd basis point, i.e. the pause in hikes, was no surprise to the rates markets as it was mostly priced in.

However, don't get me wrong here, I am bearish the NZD in the longer term. What I am saying is, don't chase it lower here, because in the short term there will probably be better prices to load up short. As we move into September and beyond, implied volatility is likely to turn higher and US short end rates are likely to pick up further, and this is when we could see a larger decline in the NZD. But for the meantime, carry remains attractive, and the NZD appears "cheap" for carry traders. So holding off shorts may be the more tactical play now as we could see some short covering from leveraged players, and some carry related demand.

On the theme of carry, the Grandpa of twitter (Mr. Morski) sent me this chart last week

TRY, BRL, ARS total return since 1995

It really goes to show the power of carry in the long run (TRY spot price has dropped some 98%, yet return is 1600%) and is a stark reminder not to be on the paying side of carry for too long... Timing, as with options, is critical with being short carry.

I spent a lot of the duller moments last week reading back over the 2014 outlook pieces from various sell-siders, and even though we give then a lot of stick, in general they've done reasonably well on their recommendations and predictions.

Now there are some clear areas that they have got wrong, volatility definitely didn't tick upwards on diverging monetary policy, however this hasn't actually meant their ideas have failed.

Playing this monetary policy divergence was how we were told to position this year, and when we hear about the terrible performance of Global macro funds, especially in the FX markets it seems weird.

Pct Change (vis a vis USD) YTD [y] vs bps change in 2yr swap YTD [x]

*"the line" +r^2 is on purpose :)

As we can see, there is a strong relationship between a currencies performance, and the move in its short end rates, as we'd expect. The only outlier, is the AUD which, even though their rates have dropped this year, remains the strongest ccy YTD.

However, going into this year, it didn't take a rocket scientist to realize where rates were going in these countries. It was obvious that with disinflation/deflation in Europe/Sweden that rates would be cut, likewise with the RBNZ hiking, the UK economy on the verge of hiking and the improving US it comes as no surprise to see their currencies stronger on the year.

For this reason, I find it odd that FX macro traders have struggled so much this year... as playing this move has paid off as below.

Basket playing the divergence b/w rates YTD.

Going on to weight the components according to the size of the move in 2yr swaps (which makes sense as we aren't going to equally rank a currency whose rate dropped 5bps, as one whose dropped 25 etc)

Weighted basket YTD

Basically, no excuse to be doing poorly is you're a "macro" trader expressing views through FX so far...

In other things, a few charts just to keep an eye on.

EUR real money selling continues, and we trade pretty much on par with the 1Y swap spread. However look for short covering into the data fest on wednesday and beyond. However, I still feel Yellen will likely surprise to the hawkish side, and I am also bullish on US macro.. hence I do not want to be short USD in any size, and particularly not past wednesday. So playing any short covering will have to be quick and tight.

EUR vs 1Y swap spread

Large 1.35s going off this week, mostly towards the back end.

EURUSD DTCC

USDCAD trade highlighted a few weeks ago doing v.well indeed, and I especially like being long USD into the second half.

USDCAD vs model (+techs)

USDJPY still range bound, looking to buy vol very soon. 3M straddle shows good value (as per blog as few weeks back) and Ideally I'd like to get long sometime this week.

USDJPY daily

US 2 year rates likely to head to 0.75% by year end. Supporting the USD against G10.

US 2 year bond yield

US5s30s still flattening...  now nearly 150bps. Keep an eye on it.

Us 5s30s

This week is likely the most exciting of the summer months, with Wed/Thu/Fri filled with plenty of tier 1 data releases from US GDP/FOMC, EZ CPI, CNH PMI, US NFP and more.


In completely unrelated things, only 17 more days ... FUCKKKK :s

21st July...

Last week was truly sad for humanity ranging from the Malaysian plane to the escalation on the gaza strip, it saw a quick sharp move lower in risk assets, with USDJPY heading back towards the low end of the 101-102 range which we find ourselves in. However, strong bids kept the hefty sub-101 stops safe for now. Likewise Gold saw a quick roundtrip from 1300 -> 1325 -> 1300. EMFX took a bit of a hit, but like the others, we saw a sizeable reversal.

The EURUSD was interesting last week, as the market headed lower to test very important weekly support areas.

EURUSD daily tech chart

1.35 really seems to be the line in the sand for the meantime, with a quick test of this area last Friday afternoon. However the market reversed to post a close above the rising trendline and critically above 1.35. Given the outlook for the summer (as discussed before), I don't see us leaving this range trading dynamic any time soon, hence still looking to fade these levels.

The fundamental outlook for the EUR looks bleak at best, while peripheral markets remain relatively strong, current account surplus is still v.healthy and risk appetite is very high, the EUR will struggle to fall meaninfully. But the divergence of monetary policy will soon become too much and the EUR will weaken. Here we see the 1y1y swaps for EUR and USD.

EUR-USD 1y1y swaps

It is expected that in 1Y's time the 1Y rate spread is around 75bps, far more than the current 21bps. As discussed in my last blog post, taking these values and assumptions into account, the EURUSD should weaken to below 1.30 in the next 12 months.

Furthermore, inflation has been diverging quite a bit recently, and expectations are also diverging. This is of course benefital for the EUR in terms of real rates, yet should weigh on the market as it will cause a further divide in monetary policy.

EZ vs US 2yr inflation swaps

I am, as suggested, a fan of the USD in any medium term outlook (given my belief that US rates pick up in H2, but i'll get onto that later). But the short term technical support in the EUR, makes me think selling AUD or CAD will be better played vis a vis the EUR.

Such as when looking at these two set-ups below.

EURCAD vs 2yr spread

I've tweeted a lot about the USDCAD and respective divergence with interest rates, yet throughout this time the EURCAD has stayed interlocked with 2yr spreads, until now. We are starting to see a divergence, and as such, I'm rotating my CAD shorts from USDCAD longs to EURCAD longs.

EURAUD vs 2yr spread

Here we see the EURAUD... it has diverged from rate spreads for a while. Mostly because the low volatility environment has supported the AUD in general (like with EMFX or NZD) as can be shown by the carry/vol chart below

AUD vs carry/vol

So while I am bearish the AUD in general, we have to respect the fact that it is up in this area for good reasons, and as such betting against right now is probably not the best plan, that is, until volatiltiy rises. Furthermore, there has been a lot of international demand for the AUD, and in particular Aussie debt... a triple A rated nation with a 10Y yield 3.4% is very attractive, especially given that it was ~100bps higher just a few months ago.

So, while I like the set-up in EURAUD, I'm holding off a bit to see how things play out. Especially with the NZD... Going into next week, here we can see the RBNZ probabilities

implied probability of OCR

 Given last weeks poor CPI print, the NZD got hit hard as there is a growing chance we don't see a hike this week. However, if we do, expect a lot of the move to be reversed. On the other hand, a temporary pause in OCR hikes will most certainly lead to NZD weakness.

Looking now at the GBP, I'm still rather bearish, and this sentiment is growing day-by-day. The market is pricing in a 2014 rate hike, something I see very unlikely given the persisting weakness in real earnings (BoE target for nominal wage growth is ~2.5% by year end, lol no chance)

We've started to see some smaller data prints start to disappoint (not just estimates, but overall) and a few more will really kick the overbought market a little, causing a more sizeable shake out of the longs

BNP Paribas' positioning indicator

GBP daily

The 1.70 is a really important level, and with the longs rather saturated, risk:reward is definitely with selling these areas for a move lower to support areas. Especially combining the idea that I feel a 2015 rate hike from the BoE is much more likely we could very well see general weakness, not just in the shorter term but throughout H2.

Another look at positioning is via 3 month 25-delta risk reversals as per below.

GBP vs 3MRR

My preferred indicator for "smart money" not CoT. Demand for downside puts has picked up a fair amount in the past week.

Anyway, the GBPUSD has two components, the GBP and the USD. Going into the last part of the year, I certainly see US rates picking up, and am still expecting to see 75bps on the 2yr by xmas.

In fun bonus charts, here is 1Y realized vol for the GBPUSD

GBP1Y realized vol

Here's the fun part... the all time low in realized is approximately exactly 1Y after I was born... So this past 1Y has been about as exciting as my first year on the planet, for the GBP at least.

With regard to the 10Y now, the recent drop-off due to geo-political tensions presented a good selling opportunity to me.

CESIUSD vs USTs

Looking at the simple driver of the 10Y, economic surprise. We would expect to see US10yrs head higher with a pick-up in US macro. Everything I see when looking at the US economy suggests we do see a much stronger H2, and as such paying US rates now is good (as talked about here)

Using the USDJPY as a proxy would work, however, how I am going to play it is short USTs (2.45% on 10Y)

Instead of buying USDJPY, I want to take the current opportnuity to enter into a 3M long volatiltiy trade.

Even though the current 3 month implieds are much lower than 2007, one critical factor to remember is that the Curve is still rather steep (as demonstrated by the 1Y-3M)

JPY 1Y-3M implieds

JPY vol termstructure, now and 7yrs ago

When comparing current term structure with that off Summer of 2007, we see that while short dated vols are much lower, there is far less complacency on longer dated vols. Unlike in 2007 when the curve was almost flat.

So it is still reasonably expensive to buy volatility, so now more than ever timing is critical.

USDJPY daily

I don't think, much like with EURUSD, we break this week, or even next. But it is eventually coming.. As I have mentioned, topside calls are very cheap, and frankly I think we see a break upwards, however being short USTs covers that thesis comfortably, as such I want to treat this as a volatility trade. So a 3 month straddle (ATM) costs 230 pips. Each day I put off entering the trade I save around $120 of theta, so I don't want to rush into buying this straddle and timing is as always key. I will also delta hedge with discretion throughout the live of the trade, however I will try to keep it relatively delta neutral, however depending on my short term views I may use the delta to hedge against my UST trade or even alongside it. Lets see.

Either way... in summary.

• I like EUR short term
• I dislike GBP short/medium term vs USD (short term vs EUR)
• Paying US rates here is great
• Tactically waiting to get long USDJPY vol... will not wait more than 2 weeks though.
• CAD and AUD expensive, NZD at risk next week
• Earth is a depressingly sad place.

Models and things.

Just going to post some of my model charts in the 1st part here, there is not *too* much to read into, especially as some go against my short term positions. Anyway;

EURUSD

EUR vs model (spread in P2)

My go-to EURUSD medium term model. A concoction of relative equity performance, Short term swap spreads and also peripheral spreads.

Observation period was 2012 -> end of 2013. So far YTD, the EURUSD has been within 200 pips of my model (but given the YTD range is tiny, not that impressive) - Right now, it seems fairly priced against the cross asset components.

Using my 1Y forecasts for my components are calculating where my model would be, given that risk premia is likely plateauing, and short end US-EU rates are diverging, my model sees 1.2982 (range of 1.32/1.278)

AUDUSD

AUD vs model (spread in P2)

Unlike many, I don't actually include Copper prices (or other commodities) into my model, instead I stick with, at least in our current dynamic, having short end rate spreads, EM credit spreads, US 10 year yield and implied volatility.

Observation period was 2013, and while quite divergent at the beginning of this year, they've finally come together.

Once again looking forward, I expect to see 10Y US rates edge higher toward 3%, US 2's to pick up another 30-50bps, and implied volatility to tick up marginally (mean reversion). While EM credit spreads staying constant (measured via CDX 5Y EM - CDX 5Y IG)

Therefore, an approximate value of around 0.865 is seen. Which given other factors does seem reasonably fair to me.


GBPUSD

GBP vs model (spread in P2)

This model focuses a little but more on forward interest rates spreads, with a greater importance on the 1y1y spread. But also positioning (as per a option skew indicator) plays a big part. Arguably the GBP is becoming (as crazy as this sounds) a carry currency and so volatility becomes a big factor, and we've seen the strong inverse relationship between GBP and GBP Implieds this year.

All in all, this is quite a different model, but still working well. A slight divergence in the past two weeks as UK short end rates have given back some of their gains. The observation period was again 2013.

Given the path for the majority of these factors, I don't see *that* much upside in the GBP vs the USD. It might continue higher in the shorter term, but in 1Y time, I would be surprised to see us above 1.70.

USDCAD

CAD vs model (spread in P2)

This model is much like EURs, strongly reliant on shorter term spreads, but unlike the others, we've seen an actionable trade (bought USDCAD the other week) which is going well (+100 now)

So with regard to my current trade, I am looking for a move back into the 1.09s eventually.

_____________________________________________________________________________

So that was a look at some of my models, now for some of my thoughts for the next week and ahead.

This next section involves looking at the USDJPY and UST's, something I have done many times before.

I'm definitely on the side of wanting to pay US rates at these levels, the US 10Y is at 2.52% and I still do think we head higher. One negative however is the carry one has to pay. A 3 month fwd, 10Y swap trades at around 2.7% (or +15bps), and so one way I am looking at avoiding paying this cost is to use the USDJPY as a proxy long for US rates.

On top of this, you would recieve 6pips from being long the USDJPY over a similar 3 month period, so instead of negative carry, its positive!

Now this is not at all a new theme, could have interchangeably used them all year, but I am very much liking the fundamentals behind paying rates, so the timing seems right for me now.

USDJPY vs US10's (red)

However, this may all be too good to be true. One major risk, and it is quite major, is the positioning in USDJPY and the enormous vacuum that lay just below market.

USDJPY, daily.

While there are noted bids doted between 101.2 and 100.8, there are plentiful stops all the way down to 100 and beyond. One bad US data piece could be the trigger to set the domino's falling, so maybe looking into options could be a good idea, so as we limit downside, and reduce risks of a "fake" breakout under 101 / 100 for example.

A 3 month USDJPY 102 (40 delta) call costs about 88 pips right now, and given historically low levels of vol this maybe the most attractive play to me. But maybe if you ask BNP Paribas they could suggest something a little bit more exotic :)

USDJPY 40 delta call volatility

Anyway, we've got a busy week ahead of us in the G10 space;

• The odd Draghi speech
• RBA + BoJ on Tuesday morning (probably same old boring rhetoric)
• UK CPI, est for 1.6% vs 1.5% prior. Quite an important print imo. carney speaks aswell
• ZEW (I pronounce it Zoo in my head...) but frankly meh
• BOC statement / conference. (poloz language wrt CAD is key, likely dovish still)
• UK employment data, my only concern is can it live up to expectations...
• US CPI / Consumer sentiment on friday, but frankly meh.