Japanese Intervention

Yippe-Ki-Ya · Nov 1, 2011

--Watching the global currency markets right now is like watching a horse race nobody wants to win. The closer a currency gets to the lead (world's strongest) the more its jockey (the central bank) does to slow it down. Some of the horses have been run into the ground. And as we come down the home stretch of the competitive currency devaluation sweepstakes, it wouldn't surprise if one of the jockeys took out a shotgun and blasted his mount away.

--Case in point is yesterday's intervention by Japanese Finance Minister, Jun Azumi. The yen has indirectly benefitted from the weak euro and chronically sick US dollar. But "benefitted" is the wrong word in our bizzaro currency universe. In this universe, strength is weakness and weakness is strength.

--A strong yen makes Japanese exports more expensive. Japan's whole trade and economic strategy is based on strong exports. It wants to make things everyone else buys. The stronger the yen, the weaker the strategy.

--But because the yen is NOT the dollar or the euro, and because it has been favoured by speculators, it is relatively stronger than the other two reserve currencies. And because interest rates in Japan are terminally low, speculators love to borrow in Japan and invest in riskier, higher-yielding assets abroad.

--That's what made yesterday's yen intervention in the market so puzzling. The gold price in yen instantly spiked by three per cent, as you can see from the chart below. But then all of the things that should have happened next did not happen. Risk assets like the Aussise dollar, copper, and Aussie stocks did not rally, they sold off. What gives?
Gold in Yen Soars on Japanese Intervention

--Why has the yen weakened against the US dollar and gold, but failed to spark a rally in risk assets? We reckon it's for this reason: traders realise the yen is the last fiat emperor standing. The fact that the Japanese are now ready to attack their own currency is not bullish for other assets. It's bearish for everything. It represents a profound escalation in the world's currency wars, with no neutral assets in which to hide (except gold).

--Finance Minister Azumi announced the intervention during market trading. He told reporters...

I've repeatedly said that we'll take bold action against speculative moves in the market. But unfortunately, we've continued to see one-side speculative moves that don't reflect the economic fundamentals of our economy. That's why I ordered intervention at 10:25 a.m. local time...I'll continue to intervene until I am satisfied.

--"Until I am satisfied?" What does that mean? And have you ever heard a finance minister say that a strong currency doesn't "reflect the fundamentals of our economy?" These are unusual times.

--Normally we'd back the speculators over the Finance Minister. But in a fiat money world, a central bank can flood the markets with infinite amounts of new money to suppress a currency's appreciation. Are the Japanese really willing to do this? And does it really matter?

--Aren't traders and investors now realising that central banks are hell bent on inflation and currency devaluation? This is a game no one can win. But the moves certainly are confusing.

--For example, the yen is down against the USD and AUD. But the move to sell yen has sent the greenback up against the yen, gold, and the Aussie dollar. This is reminiscent of the 2008 "risk off" trade when bad news drove everyone into US dollars and out of everything else.

--You can see on the chart below that the AUD/JPY pair closely tracks the All Ords. As the Aussie rises against the yen (the black line goes up) Aussie stocks go up. Murray has been following this relationship for several years in Slipstream Trader. But if the black line goes up while the red line goes down - if the yen weakens but Aussie stocks don't rally - then something different is now happening in the market with this relationship.

--Yesterday we jokingly wrote about Europe's trophy assets being for sale during this week's G-20 meeting in Cannes. Why would the Chinese buy European government bonds now that the Europeans have effectively invalidated the default insurance on those bonds through their actions on Greece?

--Wouldn't the Chinese rather have a giant, stonking, gold coin instead? Maybe like the one below that's recently been minted by the Perth Mint? Check out that beauty! It has a diameter of 80 centimetres and is 12 centimetres thick. It weighs nearly one tonne and has a market value of $50 million.

China is going to need bigger pockets

Source: The Perth Mint

--Just think! With $3.2 trillion dollars in foreign exchange reserves, the Chinese could afford to buy 64,000 of those coins! But they will probably need bigger pockets.
Click to expand...

Dan Denning
for The Daily Reckoning Australia

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Japanese Intervention

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