Macro Update - 3.6.25 - USDJPY & CCC OAS
Is there a glitch in the matrix or is something about to blow?
Just an update on USDJPY and CCC OAS.
Not one in the same but linked. I've been tweeting (@The_Macro_Brief) a lot on JPY in its bottoming process since November and its effects on U.S. yields.
USDJPY is breaking 148 to the downside. Few things are attributed.
Rate differentials: Japanese yields are sitting at 15 yr highs and been; and they've largely been ignored until recently. Higher Japanese yields, stronger yen equals lower U.S. yields. Its all a rate trade.
The rate trade and dropping of USDJPY preempts the yen carry trade, especially now that my growth scare forecast is coming to fruition. Note: in about two weeks, seasonality will favor SPY and QQQ. It will be a test whether or not a sustainable rally can be achieved.
DXY. There are multiple reasons why DXY is falling. A big one I outlined on Jan. 7 which is the TGA draining it's reserves to pump liquidity into the system due to the debt ceiling debacle. That's playing out. Secondly, rates. Real yields have utterly collapsed. Third, I outlined (in Q3-24) I believe when the yen tested 140 that a rising yen and declining dollar is the premonitions of a U.S. recession. With Q1-25 looking to be deeply negative (many reasons for this), this is exactly what you see.
CCC option-adjust spreads (OAS) are rising pretty quickly. The macro furus proclaimed they'd be no recession because spreads were at historical tights. Well, as I've written over and over, spreads are lagging indicators. They represent market optimism/pessimism and closely track the VIX. Still low, we can see some trouble once they break into the double digits. This will have huge impacts on IWM (small caps), which are down nearly 10%, and HYG. I want to see this spread break above 10 before I can Uber bearish on the two.
We may be on the verge of a liquidity issue.
