Group of fools -- Arthur Hayes

its go time

• The central bankers have chosen to convince the market that interest rate diff between yen, dollar, euro, pound and cad will narrow

  • If this narrows, market should buy yen and sell everything else

• This means all other countries need to cut rates (strengthens then yen)

• How did we get here? Post covid, we had aggressive rate hikes to combat inflation. Japan didn’t hike since the Japanese gov owns > 50% of their bonds 

  • If the the Japanese gov raised rates, their balance sheet would get wrecked

  • The interest rate difference was a large factor in the weaker yen

• Ok but rate cuts are only kosher (typically) if inflation is below target aka 2%

• The issue now is that no G7 country has inflation below 2%. But this week BoC and ECB cut rates…

• Going back to the yen, it needs to be strengthened otherwise China devalues the yuan (they have had issues competing with Japan on exports)

  • In the process US treasuries will get sold (not good for the US as rates spike)

Next up

• G7 countries meet in a week

• Big question is whether the Fed will start cutting - typically they don’t cut this close to the election

• A rate cut would be great for the dollar yen (weakening the dollar, more inflation?) 

  • Note that rising prices have not been favorable to Biden at all

• In the upcoming weeks we also have the Fed, BoJ, and BoE policy meetings

  • Hayes expects no change to monetary policy from the Fed / BoJ

  • But he does expect a cut from the BoE

Exit the Choppa Zone

• Hayes initially thought we would break out of this consolidation in August (right after Jackson Hole symposium)

  • JH is typically where abrupt policy changes are announced going into autumn

    

• Pretty clear that banks are starting to cut → Hayes thinks its go time (risk assets up)

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