Martin Luther

 

“Avoid those who search for your soul in a moneybag. For when they find a penny in the purse, it is dearer to them than any soul whatsoever.” That’s from Martin Luther in 1517. He was in a mood about rich people trying to buy their way into heaven.

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BOJ Yield Control and Formula

BOJ’s yield curve control could ignite bubbles

Bank bucks global trend by maintaining long-term rates at zero

The Bank of Japan’s headquarters in Tokyo

TOKYO — While the U.S. Federal Reserve’s rate hikes put upward pressure on long-term interest rates around the world, Japan is going against the trend as the Bank of Japan tries to maintain long-term interest rates at nearly zero.

“I wish I could say that the BOJ adopted a new policy in September in anticipation of Donald Trump’s victory,” said a BOJ executive. He seemed pleased with the outcome of the bank’s yield curve control.

Takashi Kamiya, chief economist at T&D Asset Management, said theoretical 10-year Japanese government bond yields would have been around 0.5% if the BOJ had not adopted the yield curve control.

Theoretical yields are based on 10-year U.S. Treasury yields and Japanese and U.S. policy rates. Japan’s theoretical long-term interest rates will rise along with the rise in U.S. long-term interest rates and the widening of the spread between long- and short-term rates.

Theoretical 10-year JGB yields are obtained by the following formula: (0.59 x 10-year U.S. Treasury yields) minus (0.11 x U.S. federal funds rate) plus (0.63 x Japan’s policy rate) minus 0.89.

This formula predicted how actual JGB yields would move, until the BOJ launched the yield curve control in September. The spread between theoretical and actual yields started to widen.

The graph shows that actual government bond yields have remained at around zero despite the fact that theoretical 10-year JGB yields are rising along with the uptick in U.S. Treasury yields.

Upward pressure

The BOJ’s monetary policy becomes more accommodative as the spread between theoretical and actual yields widens. The broader the gap between Japanese and U.S. long-term interest rates gets, the more likely the yen will weaken against the dollar. The BOJ’s monetary easing and the weaker yen have also buoyed Japanese stocks.

The situation in Japan is in stark contrast with China. Unlike in Japan, yields on Chinese government bonds are rising sharply along with those on U.S. Treasurys. The People’s Bank of China, the central bank, does not use yield curve controls, but that is not the sole cause of the rise in the Chinese bond yields.

With private capital flowing out of China, Beijing has no choice but to meet rising demand for foreign currencies by digging into its foreign reserves. Since foreign reserves are held by the PBOC, this means the bank is tightening its monetary policy unintentionally.

If this continues, China will likely be hit by a decline in bond and stock prices as well as a weakening yuan, and this will affect the U.S. and Japan as well. U.S. authorities are likely to strengthen their expectations for Japanese investors’ buying, as China’s purchases of U.S. Treasurys can no longer be expected.

Translating it into monetary policy, the BOJ’s yield curve control is expected to be used as an anchor to stabilize U.S. Treasurys.

That reminds us of the so-called “anchor theory,” which emerged after the global stock market chaos, known as Black Monday, in 1987. The BOJ’s policy to keep interest rates low was later criticized for leading to the expansion of the subsequent bubble economy.

The BOJ’s monetary policy is likely to become even more accommodative, as it will take some more time for the bank to achieve its 2% inflation target. Stock and currency market participants may see signs of bubbles forming, but may not want to miss out on opportunities that present themselves.

SPX500 V VIX

Few words thrown together regards to VIX and SPX500

July top by calculations reported 2855 now 3 months later the new top is 2955.71. SPX averages gained 100 points in 3 months.

SPX for 3 months traveled along its top. and without a meaningful correction. Inside SPX current price is pure noise and it deserves desperately a correction. Current prices are mid range to overbought.

Trade strategy as in July is short only until a correction to at least 2600’s trade. Impossible to long a price at its top.

Vital averages 2818.74, 2775.14, 2634.81, 2625.83, 2495.06 and 2405.44.

Trade targets 2955.71, 2904.21, 2869.13, 2813.70, 2742.65, 2681.77, 2646.07

 

VIX

The VIX is a true safe haven asset exactly as  Gold and Silver. SPX is a risk asset while VIX safe haven status trades prices direct opposite to SPX. The ViX correlation currently runs positive 12% and +31% then correlations begin to run higher positives along higher averages. VIX contains an off sync alignment problem to SPX and its related to the SPX top. The higher SPX travels then the more dysfunctional becomes VIX.

Proper VIX status as a correct trade instrument is negative correlations to SPX. A higher VIX means lower SPX while lower VIX translates to higher SPX.

Current averages 17.16, 16.17, 15.65, 15.41, 14.91 and 14.60

Trade Targets 20.31, 19.59, 19.31, 19.59, 18.37, 18.25, 16.57. Trade targets reveal 17.16 holds.

Further VIX explanation to SPX misalignment is VIX best range is 4 points. The lost component to VIX relationship to SPX experienced compression to its averages and therefore lost ranges.

 

Brian Twomey

 

EUR/SEK, EUR/NOK, USD/CAD, CAD/JPY, USD/PLN, EUR/USD

A trade target in any financial instrument represents a point of alignment to a distribution, an average. A target is a settled price, a comfort point, a location that must achieve its destination by mathematical standards. A price lacks any other choice except to align and reach its price target.

W trade on the assumption the market is correct when in reality, the market is always wrong and this is what allows for off kilter prices to trade to a target. If the market was always correct, trading wouldn’t exist. The key is to know which market price, currency pair or what financial instrument offers the best trade profit.

A settled price or price inside a specific comfort zone lacks a meaningful trade because its price is correct. A correct market price must allow time to travel to its off sync destination before a trade is worthy. This takes time especially in today’s non volatile markets. The key is to find the most non correct price in order to trade an easy price target.

A trader married to a particular currency pair or financial instrument must view prices as off base to alignment then off base back to alignment. If an off sync price achieves alignment then naturally it must travel to off kilter again. This means for example , long and short is identified by long alignment and short off kilter.

USD/CAD and CAD/JPY offer such multiple trades this week

For the week, here’s a few trades

EUR/USD watch break 1.1054 then 1.1160, 1.1266 and a massive brick wall at 1.1307 and 1.1337.

EUR/SEK

For the week, big line break 10.6975, below targets 10.6670 and 10.6362. Long term target 10.1092

Strategy. Short 10.8083 and 10.8142, to target 10.7588. Must cross 10.8083, 10.8007, 10.7854. Short only strategy.
Short entry just before 10.8201.

EUR/NOK

Break Point 9.8854, below targets 9.8472 and 9.8090. Longer term target 9.4172.

Strategy. Short 9.9904 and 10.0000 to target 9.9618. Must cross 9.9809, 9.9713 and 9.9663. Short only strategy.

Shorts just before 10.0382

USDCAD. Break Point 1.3267, below targets 1.3186, 1.3161 and 1.3149

Strategy. Short 1.3321 and 1.3348 if seen to target 1.3270. Must cross 1.3294. Short below 1.3267 to target 1.3186. Must cross 1.3240 and 1.3213. Long 1.3186 to target 1.3253. Must cross 1.3213 and 1.3240. Short only strategy.

CADJPY. Break Point 81.29, above targets 81.76, 82.15 and 82.58.

Strategy. Long 80.41 and 80.20 if seen to target 81.20. Must cross 80.41, 80.85 and 81.02. Long above 81.29 to target 82.36. Must cross 81.72 and 82.15. Short 82.36 to target 81.50. Must cross 82.15 and 8172. Long only strategy.

USD/PLN

Break Point 3.9251, below targets 3.8943 and 3.8635. Longer term target 3.7381.

Strategy. Short 3.9559 and 3.9713 to target 3.9328. Must cross 3.9559, 3.9405. Short only strategy.

Shorts just before 3.9867. Watch break 3.9251 and take this short immediately.

Brian Twomey