FX Market – Ben’d Over?

Bruce Krasting's picture

Another big week in FX. The closing prices in NY Friday were on the edge
of some critical levels. I see no reason why the underlying themes will
not continue for a bit longer.

The Euro picked up against just about everything.
EUR/JPY +0.7%
EUR/USD +1.9%
EUR/CHF +1.2%

I have to believe that the folks at the ECB are not happy with this. The
EURJPY cross is very important to the EU. The dollar rate must make
them sick (and angry). The back up in the EUR/CHF is interesting. In an
environment where the dollar was weak and gold was strong this move ran
counter to recent trends. I see this as evidence that the “short Euro
trade” was getting unwound. That hit the dollar and the Swiss cross.
Market volume for all crosses was heavy all week.

The USD numbers:
EUR/USD +1.9%
USD/JPY -1.4%
USD/CHF -.75%

There is a slow motion “run on the dollar
taking place. It is popping up in the big money centers and the small.
The markets are all orderly so there is no sense of panic. But there is a
non-stop movement out of dollars. One week it is into the CHF, the next
to the Pound the Euro or the Yen. Some of it is going to gold and other
PMs. But when I see that that Brazil, Russia and S. Korea are
intervening to offset a supply of unwanted dollars I get worried.

The money is moving. Once the process starts it can get messy. October is often a time for messy things to happen.

The move against the dollar is about Ben Bernanke and his non-stop hints
of QE-2. The FX market is just going through the process of adjusting
to the reality that will be with us as of 11/3. More QE is coming.
Bernanke has been leaking bits and pieces of his plan to the press in
order to give the market a heads up on what is coming. He wants the
markets to adjust to reality before it is a reality. That way he can say
that the post market reaction to QE2 was muted.

One area to keep an eye on this week is the JPY. It is possible that the
Yen becomes a flash point for a jump in FX volatility and an increase
in the money flow. I have been looking for signs that would give us some
hints on the tactics to be used by the BoJ in its intervention policy. I
want to know if the BoJ is on offense or is it playing defense.
If it is defense the door is open for some action that could spill some
milk. There are few tea leaves to look at. Some information from the
Japanese Ministry of Finance got me to thinking.

MITI has reported that the magnitude of currency intervention since
September 15th was Yen 2.125T. This amount is a bit larger than the Y2T
that was being discussed. MITI did not confirm it, but this number makes
me believe that the BoJ did a very splashy job of publicly disclosed
intervention on 9/15 and they did small amounts (that were not
disclosed) on at least one other occasion. Most likely the second
intervention took place on 9/24.

Consider the amount. 2.125 T. A curious number. Why such an odd amount?
It could be random, the sum of the concerted intervention just happened
to total to this amount. But that does not line up with Japanese
precision. So I am left wondering.

It just so happens that if you take Yen 2.125T and divide it by 85.00
you get exactly $25,000,000. That is a nice round number that makes me
happy. My take is that the BoJ made an internal decision to intervene
for a fixed dollar amount. It was not an open-ended approach. I think
someone (Shirakawa) said, “Lets buy $25b if the dollar slips below 83.” After that we will just see what happens.”

That strategy would be defense. It means the dollar will have to grind
lower. I expect the next BoJ intervention to occur in a range of 81.80
and 82. After that round is digested the BoJ will drop its intervention
to yet another lower level. Probably closer to 81. Should that prove to
be the case it will result in some big moves in all the Yen crosses. The
dollar may catch a short term bid against the Europeans if we see money
flow out of EURJPY. But that will be a head fake and an opportunity to
sell more dollars. If the BoJ signals that it is in an orderly retreat
the net affect will be a broad move out of the dollar. I am expecting a
big volume week.

If next Friday the Buck is lower across the board and the BoJ is a bit
bloodied Ben Bernanke will light a cigar. That would be the script that
he wants the market to follow. What Ben would like to see is an orderly
retreat for the dollar of about 10%. We would be able to export some
deflation to our trading partners if that were achieved. The big risk is
that orderly becomes DISorderly” and some of those “partners” retaliates in some subtle way. One or the other of them might say, ”If you’re going to treat us like this we are not buying your bonds. You’ve proved they are not money good”.

What are the odds of a significant blowup in the FX market? Pretty low.
Maybe 1 in 5. However, if the dollar trades to 82 this week and the BoJ
is a no show, the odds of a blowup go to 2 in 5. The NY close for
USDJPY was 83.20. About 40 bips from where the rubber meets the
intervention road. An Octoberfxest. Could be a wild party.

I am going to ignore the evidence that BoJ intervened sub rosa on the
24th. I think this may have been just a “clean up” to bring the total
to the agreed 2.125T. The amounts involved were small and had only a
very short impact. Future intervention will be at lower levels and it
will be immediately confirmed by the BoJ (attempt at Shock and Awe).
This is a critical assumption of mine. It is a big gain/big loss kind of

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Djirk's picture

Dear Ben and Timmy:

US and Euro zone are roughly the same size in terms of GDP. But the $ continues to get pummeled.

One word austerity! You can not get rid of a debt bubble with more debt. And debasing your currency will not encourage trade after you screw your biggest creditors.

That is all


ColonelCooper's picture

Thank you Bruce.  Another excellent post.

Mr Lennon Hendrix's picture

Intervention ain't meanin' what it used to!

RoRoTrader's picture

Buying, selling or not trading?

RoRoTrader's picture

HaHa!.......only the FED knows.

fresbee's picture

Thank you. Useful analysis. EUR/JPY is the cross to watch and it will lead all others yen crosses for the time being given that EURO is still pressured by YEN and at some point will break away from 115. As and when that happens, BOJ will not need to intervene for some months as it will involve selling sizable YEN in the markets automatically re jigging USD/JOPY to 87/88 levels. 

DoctoRx's picture

I see no reason why the underlying themes will not continue for a bit longer.

Only "a bit" longer"?  Why not ad infinitum till a new Volcker appears?

Specifically re the yen, IMVHO they are still being forced to pay for Pearl Harbor.  Bad decision, Mr. Emperor.

99er's picture

Chart: ES

An interesting week ahead? You betcha!


suteibu's picture

Nice post, Bruce.  And I agree with you on the "clean up".  At the time it seemed more like a head fake or rumor than anything substantial.

Silversem's picture

I agree bingaling, commodities are the place to be, especially pm's. currency pairs can go either way, but al currency wil go down against pm's long term.




bingaling's picture

who isn't going to print ? The EU has 2 choices to counter this - 1 print or kicking a country out of the EU or letting a Big bank die(I wouldn't be surprised to see a bank failure which might put a hurting on a US bank)  - Japan will interveneand print as much as they need to  - The Suisse are a big may or may not - China is not going to let the yuan rise even if congress votes to start putting tariffs on goods coming from there if they don't . All and all the best place to be is commodities(If you have a conscience stay out of food) - with the exception of oil being it won't be used with everybody looking to pay for their groceries only .  Gold and silver are the best bets in my opinion . Being the only thing you are doing is telling CB's around the world what assholes they are .

doolittlegeorge's picture

Diversify into Irish debt?  When the debasement of paper itself is "what's going on" it seems to me it is no accident that the DJIA rallys.  That's because "money is best what is closest to home" if not in the home itself.  That does not equal WEALTH of course although needless to say "when oil surges one must question foreign accounting as well."  We may have "bubbles."  What we know we have is "risk."  If history is any guide "the banks will do a bad job managing it again."

mikla's picture

An Octoberfxest. Could be a wild party.


Who says this finance thing isn't both *interesting* and *funny*!?

PragmaticIdealist's picture

The name of the game is to diversify out of the US dollar as covertly as possible.

Once everyone catches on to the fact that everyone is playing out the same strategy, the race to kick the dollar to the wayside will intensify.

So long as everyone thinks they are being sneaky, however, the decline will continue at a slow pace.

"A military operation involves deception. Even though you are competent, appear to be incompetent. Though effective, appear to be ineffective." - Sun Tzu, The Art of War

99er's picture

(Reuters) - China pledged on Sunday to support a stable euro and not reduce its holdings of European government bonds in an effort to deflect criticism of its foreign exchange policy ahead of an EU-China summit this week.

Kayman's picture


So where does that leave China ? 

If everyone wants out of the USD then Ben will get the inflation he so desperately wants. And China will desperately need to find a replacement for the vendor financing of the U.S. consumer.

PragmaticIdealist's picture

Ben needs to be careful what he wishes for. Dollar devaluation and the ensuing inflation will not increase the net real wealth of Americans, even if some manufacturing jobs are created.

China needs to stop financing vendors that have absolutely no means to repay, and won't even create products that China wants or can afford. The US is bankrupt and predominately produces high-priced and discretionary services/goods that the Chinese cannot even afford. Why should they finance a trading partner that is bankrupt and doesn't even use the investment to produce something of value to them?

If the Chinese allowed the yuan to appreciate so that it could actually afford the goods from other nations, an argument to provide financial support to other nations could be made if and only if the receivers of said financing agree to austerity measures.

Orly's picture

Yeah, Prag, it's a crazy world.  But what are they supposed to do with all that money in the meantime- build stuff, then tear it down and haul it away so they can build more stuff?

Could that really happen?

Ted K's picture

In China???  5 cycles of it before you can say "Long Tall Orly".  That's one of the things our "wonderboy" Hugh Hendry is missing.

PragmaticIdealist's picture

They need to do the following:

1) Buy as many commodities as they can without making prices skyrocket.

2) Convert as much US currency to Yuan and invest in and purchase things from their own corporations.

3) Lower personal income and other taxes to 0 or close to that, since they already have plenty of cash anyways.

gillimus's picture

Once hyperinflation hits we will all work in local Apple factories making iPads for the Chinese consumer.

Orly's picture

No matter the machinations of any central bank in the world, the real underlying market mover in 4X is still risk-on v. risk-off.  The SPX hit the target of 1155 late last week, then retreated slightly.  I had expected that after this level, the risk-on trade would be muted, followed closely by a full-blown risk-off scenario.  Didn't happen.  Why?

Enter Bernanke, Yellen, Plosser, Dudley...mouthpieces jaw-boning, "mo' money, mo' money, mo' money." Looking at the trading happening, especially in the AUDUSD cross, it is apparent that the movement is getting quite "heavy" (i.e., small, tight candles up and long candles on the retraces...), and for the Fed to be able to move the cross much higher would, indeed, take a C-130 dropping one hundred dollar bills from Pennsylvania to Nevada.

But who am I to second-guess the august Federal Reserve?  Well, I am citizen of the United States and I am feeling some rumblings such that the next 4X surprise could come from a deeply affected populace.  Another trillion dollars down the rat hole?  I don't think so.  If nothing else, the "apolitical" Fed (I love the line from MarketTruth on ZeroHedge that said the Fed is truly apolitical because they own everyone equally!  Classic...)- the apolitical Fed had better watch for their interventions to not be politicised at all.  If it seems that Bernanke is doing this to either save the banks again or for the purposes of Obama's re-election, then they could be in a world of backlash from the American public.  People are waking up to this stuff and if a public outcry against QE 1.5 (as Joe Kiernan called "only" $500 billion...), then you will see volatile moves in the 4X markets.

For the time being, I am sticking with my calls of short EURJPY, very short AUDUSD and USDJPY to about 82.

I don't think there is a certain level they are looking for at the BoJ, rather, they are going to try to ladder down the effects of their intervention.  In other words, don't expect a certain target to be reached before the BoJ announces additional measures.  Instead, look for a specified date (and, no, the Japanese don't do anything willy-nilly...).  They intervened on 15 September and I would expect them to do it again on the 15th of November.

You're right, though, Bruce.  It is one hella time to be a 4X trader.  The greatest game in the world!


RoRoTrader's picture

Orly.......you didn't mention Posen........

You know, Posen, the American from Haavaard currently enjoying tenure with the Bank Of England while employed spreading QE2 rumors for the Queen.

RoRoTrader's picture

Funny play on words; Posen from Harvard.......is that a fluke? Probably not is my guess. More like more head fux.

Starting to look like The Ugly Harvard American........multiple lobotomies Dr?.....why not make it a double, Dr Harvard fucker.

DoctoRx's picture

Orly-what's with the change of avatar?

Orly's picture

I wanted everyone to see my hat!

Wanna frighten people?  Everybody get a hat from the ZeroHedge store!

Do you not like it?


edit: I am going to try to re-size it to see the ZH logo better...

Bruce Krasting's picture

I like the old one. I keep wondering if it is you?

Orly's picture

Hmmm.  I'll take that as a "nyet!"  Okay, I'll change it back.

That's funny, I keep wondering if that is you in your pic.  You look like that guy from The Office.  :D

RoRoTrader's picture

Love Story........sorry,too easy.........btw Orly, Kayman is an asshole.......wait, wait, I take that back; Kayman is definitely an asshole.

Forget about BK, Orly........think about us.

Love Roro


ps Orly.......I was wondering?......what do you think about buying the DAX?

Kayman's picture


With the Yuan/USD peg Japan is going to be squeezed hard. Where will this beggar all currencies end ? Say in a year?

Not a 4x trader. 

RoRoTrader's picture

Kayman is .........Not a 4x trader.

How did I know that Kayman?........probably not a commodities trader either, right.

Kayman's picture

I deal in cash and commodities but not of your persuasion.

RoRoTrader's picture

Nickles, dimes and bubblegum?

Orly's picture

Not a 4X trader!?!?  How is it possible?  Get a demo.  IBFX.com (absolutely no compensation nor conflict of interest...).  You'll never go back to trading options again.  I promise.  :D

Wow, you know, that is the most interesting question in 4X now over the coming year to five years.  What about the Japanese?

Japan is quite a convoluted case involving interest rates, which is (normally...) the basis for 4X trading.  With all interest rates at extremes right now, it behooves the trader to analyse a scenario that could probably unfold.  Demographics may give us a clue.

Post-war Japan was very much like post-war America in that there was a baby-boom and high savings rates among the people.  Americans had savings bonds and the Japanese have had their JGBs.  Re-investment into the building economy was natural and automatic because there was a lot to rebuild in Japan and a lot of re-tooling to be done in American manufacturing.

For years, the US paid competitive interest rates and relied on the rest of the world to buy them, while the Japanese took the other tack in paying low interest because it was the Japanese people who bought the bonds and funded the most spectacular explosion in high-tech manufacturing the world has ever seen.

That was then.  This is now.

One has to think outside the box when thinking of the yen in terms of imports and exports.  The Japanese have been so successful at out-sourcing their own manufacturing to other nations that the effects of the relative over-valuation of the yen is dampened to a great degree.

For instance, Toyota as a Tundra plant in San Antonio.  They import the steel from Ashland, Kentucky (for some reason, Toyota really likes the steel roduced there...).  Drive through Mississippi and Alabama to visit Nissan, Mercedes and other "foreign" plants right in the heart of Dixie.  I am not certain by any means, but I would imagine that the Japanese have accountants and producer/buyers that are able to hedge their bets through currency swaps and just plain-old American accounts denominated in US Dollars for their money transfers.

I would bet that they trade either in local currencies or USD anywhere outside of Japan.  The kicker comes in when that money is repatriated to the island.  Ninety yen as opposed to 120-yen for every dollar would piss me off, sure, but it wouldn't be the end of the world.  Getting close to eighty and all my money starts to disappear.  Now, I'm starting to fume.  Watch the 80 USDJPY level closely.

So, in a long-winded answer to your query, it seems that the renmimbi-peg is basically meaningless vis-a-vis Japan.  Besides, any rise in Japanese exports to China today may well be offset by the Chinese duplicating the process and selling their own knock-offs to their own people down the road.

  Also, strange things are afoot in the commodity arena what with the Japanese hoarding rare-earth metals.  That could kick-start another round of inflationary panic amongst high-tech manufacturers.  Watch for that, too, as it should prove to be far more important than whether the Chinese are keeping their currency artificially low.

Today, the Japanese have one of the lowest birth-rates in the "Western" world.  (France and Germany are not much better off in that regard, either.  I'll spare ZH the inpolitic discussion on where their labor is coming from but, as I am sure you can imagine, it is a double-edged sword that is only now coming down on the heads of European nations...)  In other words, there aren't any kids to buy Japanese government bonds any more and the government is going to have to take steps to keep their nation afloat through taxes, austerity and by having a competitive interest rate on their government issues.  All very, very popular with the Japanese people, by the way.

Also, today, US interest rates are essentially negative.  That's not good from a re-investment standpoint, either, because the only people buying our bonds are the ones scared half to death (of an eventual US default...) and you cannot rely on fear as a business model unless you're an insurance company.  Faith in the United States' economy is on shaky ground right now and that may mean the Fed will have to boost interest rates to encourage re-investment, while at the same time trying to roll over mountains of debt as cheaply as possible.  Hmmm, now just how is that rabbit produced?

As you can see, Catch-22s abound everywhere.  Over the next few years, there is going to be a radical shake-up in global economies, some for the better and some for the worse.  Either way, keeping your eye on the unstoppable forces of demographics and interest rates over the next few years will help you in your trading decisions.

A year from now, I expect that we'll be bascially in the same boat with central banks rotating through (in a conspiratorial fashion?) periods of strength and weakness.


Kayman's picture


Thanks for clearing things up.


suteibu's picture

In other words, there aren't any kids to buy Japanese government bonds any more and the government is going to have to take steps to keep their nation afloat through taxes, austerity and by having a competitive interest rate on their government issues.  All very, very popular with the Japanese people, by the way.

The Japanese can do austerity as well as anyone and who wouldn't want more competitive rates on the bonds (except the government when you consider what a 1% rise in rates will do to debt servicing) but the taxes aren't nearly as popular with the people as the media/government polls would have you believe.  Note that it cost the DPJ the Upper House election this summer.

99er's picture

Nobody likes us anymore, not even the French. Ras le bol.

99er's picture

Chart: USD/JPY

Perhaps a Double Bottom?


[Love that "no pan shabu-shabu."]

99er's picture

Kabuki Is Japanese

(Reuters) - Recent currency market moves are too rapid and too speculative and the yen is becoming too strong, too fast, causing serious damage to Japan's economy, Japanese Chief Cabinet Secretary Yoshito Sengoku said on Saturday.


RoRoTrader's picture

Kabuki Is Japanese

so is Bukaki.........FED knows Japanese.

El Hosel's picture

 Central Banks screwing central banks because there is nobody else left standing to screw?

99er's picture

Believe it's more like BRIC central banks screwing Western central banks until the next G20 and possibly a new Basle Agreement. Nobody in their right mind wants their reserve currency managed by our bozos in Washington. I'm sure there are various ways to say "enough is enough." Prettiest of course in Brazilian Portuguese.

El Hosel's picture

   "I see no reason why the underlying themes will not continue for a bit longer".

   Yeah,  the next BOJ intervention won't happen at least until 3a.m eastern time...Feel lucky?

 Geithner's "statement" the other day regarding no "currency wars",  or even knowing such a thing is possible  was a real beauty... Right Timmy, nobody cares what the cost of money is.

tom's picture

A 10% dollar devaluation equals an easy profit of 1.8% of aum for managers of dollar denominated hedge funds that are net 100% long. Beginning to understand why Tepper was so happy about QE?

RoRoTrader's picture

Oil broke $80 with conviction.......on its way to a $100?

Mr Lennon Hendrix's picture

Oil spike and it could be $200.  What would stop it?  The dollar?  Ha!