Wednesday, December 3, 2014

Closing in on One Twenty


Three major FX pairs are closing in on rates where the big figures start with 120. The ones that have my interest are:

USDJPY = 119.40

EURCHF  =1.2030

EURUSD = 1.2335


USDJPY looks like it wants to cross 120 in a matter of hours. The question is what happens when it does. My guess is that the folks at the Bank of Japan don’t want the dollar/yen to rise much above the 120 level for the time being. The Abe snap election is just ten trading days away. An element of the election is the central bank’s policy of weakening the currency. Japanese voters understand FX rates; they know they are paying more for imports and paying a ton more when they travel abroad. If the BoJ wants to buy some votes by  micro managing the FX rate with a temporary “lid” on USDJPY it certainly could.  We shall see soon enough.

But assume that Abe gets his vote of confidence on 12/14. What does that mean? Adios 120. Another 20 big figures to 140 is a reasonable estimate. Another big move up in USDJPY will be the fuel for a currency war. Korea and China will not just sit back and let it happen.


EURCHF is a wild card (it might be a Black Swan). The head of the Swiss National Bank, Thomas Jordon, was drinking Kirschwasser after his big win on the gold vote last weekend. The vote was 4-1 in his favor! But where is the EURCHF today? 13 measly ticks above the close before the key vote. This lousy bounce from that vote? And Jordon felt it was necessary to issue an unusual Sunday SNB Press Statement that reaffirmed the SNB’s commitment to “Do what it takes” including negative interests rates and unlimited intervention to support the 1.20 peg

I, for one, believe Mr. Jordon. I think he’s willing to write an enormous check to back up his promise. I think he has enough ammo to hold the Alamo for a while longer. But I never believed that “Unlimited” was a realistic description of the powers of the Swiss Central Bank.

If Mr. Jordan’s phone starts ringing over the next few months, and he’s forced to put in bids for $250B Euros, he might have to blink. A 50% increase in reserves in a short period of time would force the unpleasant question, “What does unlimited really mean?”

I put a break of EURCHF 1.20 as a low probability. But, on the other hand, a 1/4 Trillion Euros is not all that much money these days – so this has fireworks potential. What is at stake is not just the Swiss peg promise. If the SNB adjusts the peg to a dirty float, then the market would, in a matter of seconds, redirect its sights on Mr. Draghi’s promise of “Anything”.  This scenario may be unlikely, but it’s a bad road to go. What could trigger a move on the SNB? A weak Euro would be the ticket to this show. How likely is that? Very!


At 1.2330 the EURUSD seems miles away from a break through 1.200. I think it could happen by Christmas. The best reason I can give for this is that all of the ‘Deciders’ (especially Draghi) want it to happen. We’ll see if the markets give Draghi what he really wants for a Yule celebration. The problem comes shortly thereafter when the talk runs, “We blasted through 1.20, the next stop is 1.10, better get in now or miss it!”


These potential breaks of the One Twenty levels are milestones that will trigger more volatility. They are somewhat correlated as a major driver of this is the weak Yen. A cheap Yen puts pressure on the Euro, and that will influence CHF demand.


There is a factor in this that has me wondering. What is the status of the FX Interbank market? Is it solid?

There are thousands of FX players, but the top 50 financial institutions make up most of the volume. The big guys are market makers, the rest of the actors are price takers. Where do the top 20 players in the FX market stand today?

Many of the top spot traders have been fired or forced to resign. Others have seen the light and moved on to greener pastures. Trading desks have been thinned, position limits cut. Prop trading has been cut back. Robots do most of the pricing. Auditors look at every trade. Compliance types are peering over shoulders. All communications are monitored. I’m concerned that the ‘Second String’ is manning the desks.

Put that together and ask, “Is this weakened system able to absorb a spike in one-directional volume? Will it step up and keep order? Or will it back off and allow volatility to roar? “

We’ll find out when the One Twenties get crossed.







  1. Welcome back. Missed your column.

  2. I was wondering if you would post again! Great fx insight and commentary. Thanks.

  3. Yes. Welcome back!

    Thanks for the heads up.


  4. Welcome back!

  5. Glad to see you posting again Bruce. Hope everything is well.

  6. back when Abenomics got started i figured 140 would be the death sentence of eurjpy. turns out 140 is correct. but for usdjpy. scary shtuff

    bk is always right.

    was hoping you’d resurface with a pimco story or two back when that all went down. either way glad to hear the lone voice of reason again.

  7. Tks folks – I’ve missed you too!

  8. I noticed your post coincided (somewhat) with recent rains in California….

    The Yen is over 120.

    Or, are you gonna make us wait for the Euro?

    Welcome back!

  9. Thanks for writing again BK. You are still relevant and appreciated.

  10. Bruce is finally back.

  11. Nice work Bruce!

  12. Bruce
    Your `12/7 piece on Keystone Pipeline highlights that if the drop in crude helps to put off a recession until 2017, you believe that the US deficit cut drop to 2.5% of the budget in FY 16.

    Yet another argument to buttress your well reasoned view that the USD may be about to launch into an even bigger rally in the new year ahead.

  13. Welcome back! I missed your works

  14. As an ex-FX trader in London, I can tell you that I have ZERO confidence in the “true” liquidity of the current FX interbank market. When we get a heavy one-way move you’re gonna see a stampede for the fire exits…

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