IMF giving FX strategy advice now?

Seriously - it's actually good advice though.

Author

Tim Vollans
October 16, 2023 • Estimated Reading Time: 5 minutes

JP Morgan’s CEO reckons the world is facing the most dangerous time in decades, while the IMF offers advice on how to trade ‘the FOREX’.

And our experiment begins…

🧠 The Big Brain
The Day Trading Experiment

Most of what we do around here is macro. Looking at the bigger picture, identifying trends, and generally piecing together the market puzzle.

For traders, there’s a problem with this approach.

The waiting…

There’s an old saying that ‘the devil makes work for idle hands’, and sure enough, while you’re waiting for big macro trades to set up & stars to align, the devil spots an opening…

Yep. Tempting you in with a bottom/top signal, and you take yet another sh*t trade...

We’ve all done it…

But, I don’t think it’s day-trading that’s the problem. I think it’s much more ‘punting out of boredom, basically gambling’ that gets people into trouble. 

So, I decided to run an experiment to see if my theory is right…

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âš¡ The Spark
The Most Dangerous Time In Decades

…was Jamie Dimon’s cheery summary last week.

As CEO of JP Morgan, the largest global bank, he’s got fingers and toes in a LOT of pies, and visibility of so much of what goes on in the world.

Yet he’s got just the same worries as everyone else about inflation, fiscal deficits, tight labour markets and wars.

Despite all of that, on the earnings call, his colleague Jeremy Barnum (JPM’s CFO) offered up some more balanced and informative commentary…

“Consumer spending growth has now reverted to pre-pandemic trends with nominal spend per customer stable and relatively flat YoY.

Cash buffers continued to normalize to pre-pandemic levels with lower income groups normalizing faster"

TDLR: back to normal is definitely the theme of the day, but nothing more severe just yet.

When asked if he was seeing softness in credit anywhere:

…the answer to that is actually nowhere roughly or certainly nowhere that's not expected, meaning we continue to see the normalization story play out in consumer more or less exactly as expected.

And then, of course, we are seeing a trickle of charge-offs coming through the office space. You see that in the charge-off number of the Commercial Bank. But the numbers are very small and more or less just the realization of the allowance that we've already built there.

So, consumers still fine, back to normal but fine.

Credit losses: Loss chargeoffs are up, but well within the expected ranges that they’ve already planned for, and because there’s no recession coming, all the banks are setting aside less capital buffers to cover future credit losses….

Did they over-react before or are they under-reacting now?

💡 The Lightbulb
IMF tells everyone how to trade FX

Very few are set to listen to them though…

Over the weekend, a senior IMF official had a few bits to say about the yen and BoJ.

Stealth bomber: seemingly this Tweet (I am not calling it an X) went under the radar — but it shouldn’t have.

For all the IMF’s faults, this comment is bang on and this fella or fella-ess sounds like they know what they’re on about.

What moves currencies?: The PRIMARY driver of FX is interest rate differentials, but many will still desire to pretend that it’s something else.

Of course noise shifts the market around a bit, but said noise tends to matter if it culminates in an aggregate change in rate pricing.

Safe havens: yes, of course safe haven bids occur (at least they used to), but you’ve got to ask whether a safe haven bid provides enough of a reason to deviate from the driver of interest rate differentials…

And perhaps a safe haven bid only occurs when rates are equalised, which would make sense when looking at USDJPY in context for example, since even though things are pretty shit, the dollar is preferred…

Could be something to use there 👀

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