There was a four year stretch where I was responsible for big currency spec positions. I was regularly over a billion dollars long short in either USDJPY or USDDM (this was before the Euro). This happened many years ago. I don’t think things are any different today, there are plenty of folks making mega-billion dollar currency bets in April 2013.
The numbers back then were surreal. Daily P/L changes were regularly $5m. It was not unusual to make or lose $25 million in a week. There were a number of us involved in this effort – trading at this level requires a 24/7 effort. We all had a percentage due to us based on the annual results. Of course we tracked what our share of the daily gains and losses were. At one point someone started to measure the personal results in cars, not money. It was either dark comedy, or a way of obfuscating the big numbers we were confronted with on a daily basis. I can understand how some readers will find this repugnant, it’s the way of fast money.
I did if for four years, it wore me down more than you can imagine. I had to give it up. The FX market doesn’t owe me a thing, but I still have the tire tracks on my back. The money was one thing, the stress was a different story.
The markets were very liquid. To buy or sell $1b was a few phone calls; it took only a minute or two. From 6pm Sunday in NY, to around 4 on Friday there is an active FX market someplace on the globe. If you had to turn-and-run on a position, you could do it. But after 4 PM on Friday, you were dead in the water. For the next 50 hours you were stuck with what you had. And of course, these are the hours when big things happen.
To be “square” on Friday night meant you could sleep through the weekend. But you didn’t make money that way. We were paid to take big risks. I sweated through dozens of those weekends.
I bring this up as I was reminded of those times with the 4:30 pm Friday release of information by Treasury Secretary Lew (Link):
There are two potentially market moving sections in the report. The Treasury Department planted a “dirty bomb” at the Bank of Japan, and tossed a grenade at the Swiss National Bank. I’m thinking of all the folks who are big long USDJPY. They are going to have to sweat the next 50 hours. They have to hold their cards and wait. I suspect that quite a few FX players will have their weekends ruined.
The key words on Japan:
We will continue to press Japan to adhere to the commitments agreed to in the G7 and G 20, to remain oriented towards meeting respective domestic objectives using domestic instruments and to refrain from competitive devaluation and targeting its exchange rate for competitive purposes.
A more subtle approach was taken by Treasury with regard to Switzerland and its currency peg. In prior reports, the Treasury has said that Switzerland should return to a true floating rate, but only when “Conditions in Europe have been stabilized”. The latest report omits this language. The clear suggestion is that Switzerland should normalize its exchange controls sooner versus later.
The 4:30 PM timing of the Treasury announcement was done to minimize the market consequences in the US. It does set up for an interesting opening in Asia Sunday night. Having been in this situation a few times, I’ll hazard a guess on how this turns out. In the early hours Sunday night, when it’s just Australia that’s awake, the USDJPN will set a low of about 98.00. By the time the Tokyo, Hong Kong and Singapore markets are up and running, USDJPN, will be closer to 99.
I think the “lasting” market effect of Mr. Lew’s statements will be measured in hours. I don’t think the Bank Of Japan will stop printing money, in fact I think they will make an affirmative statement that will weaken the Yen. Nor do I think that the Swiss National Bank will pay any attention to what Lew has said.Some headlines will come that will read something like:
BOJ not targeting any level for USDJPY.
BOJ not attempting devaluation of YEN in FX markets
BOJ committed to QE policy set forth on 3/14/13.
BOJ to maintain target of 2% inflation.
BOJ policy is not inconsistent with G20 or G7.
SNB says 1.20 peg will be maintained.
SNB reaffirms it will intervene in unlimited quantities to maintain Peg.
SNB says USA is manipulating global markets more than Switzerland.
SNB say US Treasury Secretary does not understand FX markets.
We have an interesting setup developing. Japan has gotten a warning from its biggest trading partner (and military ally). And Japan is going to completely ignore it. When the rebuke to Jack Lew comes (it will) it will be the clearest sign you could get that the door is open for another big up move in USDJPY. Japan Inc. is going to thumb its nose at Jack Lew. And there is not a damn thing that Jack Lew can do about it.
– Jack Lew will replace Geithner as Treasury Secretary. This choice will be driven by Lew’s knowledge and experience with budget matters. But Lew knows nothing of the capital markets and this will be a problem when a non-budget crisis emerges. Lew will say something about the currency markets that causes a big flap. There will be calls for his resignation as a result.
I think we just had the Jack Lew moment that I was anticipating. I believe that Jackie Boy has made a mistake. He picked a public fight with Japan that he can’t win. Having picked the fight, he can’t back off. When the BOJ and the markets make him look silly (USDJPY = 110+) there is going to be pressure on him. Jackie has set himself up for a fall.
In all my years of watching (and participating) in the FX markets I have never once seen a situation where “talk” accomplished a damn thing. In fact, idle talk often creates the opposite reaction to what was intended. So for those who are having sphincter problems this weekend over a long USDJPY book, and the 50 hours you have to wait to find out what happens, I say relax. By the opening in NY on Monday, you will be okay again. In a few weeks you’ll be buying hot cars and houses.
Jack Lew, on the other hand, is in for a jolt. He probably thought he could talk, and markets would obey him. Some egg is going to hit Jack in the face. The “rule” in these matters is that you don’t pick a public fight that you can’t win, and that is exactly what Lew has done.