Potentially Interesting Isolation On JPY

by: Jeffrey Snider

Today was the third consecutive down day or selling in eurodollar futures. The June 2018 contract settled below 98.80 for the first time in April, almost unwinding the move higher at the start of this month. Even after the selling, the eurodollar curve remains as depressed as ever, discounting an entirely different set of future circumstances than stocks or junk bonds.

SABOOK Apr 2016 Japan Eurodollar Futures June 2018

It is that move after March 16 and really starting around March 29 that is more interesting. At the time, it looked very much like the expected (by me, anyway) revisit of broad eurodollar trouble or the approaching countdown of the "ticking clock." There was an enormous repo warning just prior to all this, of course, but it hasn't so far proven (yet) to be the same kind of disruption as we have seen before.

SABOOK Apr 2016 Japan Eurodollar Curve

That much was obvious by the lack of participation via the Chinese, at least so far as indicated by the eurodollar world's central correlation of CNY (against whatever). It may indicate (and indicate still) something about the "dollar" or perhaps continued PBOC influence (subscription required), but what was distinct was instead the forward nature of JPY. You can see the eurodollar move at the end of March/start of April matched perfectly with this last part of yen appreciation that had already caused a lot of stress and headache in Tokyo, the Bank of Japan in particular.

SABOOK Apr 2016 Japan Eurodollar June 2018 JPY Click to enlarge

It wasn't matched by anything else, at least nothing that stands out to me. Sterling, for example, followed much more closely CNY than JPY, which is significant because pound and yen are very often a mirror image of each other under just these sorts of conditions. I have suggested before that this proposes a specific Japanese "dollar" issue which was certainly indicated by hugely negative basis swaps, and without seeing it continue or reflected elsewhere it does seem like an isolated and specific disturbance.

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I would not rule out general "dollar" problems just yet, but there might be significance in this development. The world may be mostly correlated with CNY for now, but JPY can still be a central agent. It may sound too nonspecific to be serious until you realize just how badly the Bank of Japan has messed up Japanese banks and really money markets there.

Click to enlarge