instability in the FX markets. The problem is with the “Strongs”. The
Yen and the CHF are both at near records against the dollar and they are
at records versus the Euro. These records are a cash machine for the
FX crowd. The CBs know it and they do not like it.
IMHO the only thing that is going to stop the cycle of the Strongs
getting stronger is coordinated intervention where the NY Fed took an
active and visible role. We are not going to get that.
I think that is an important conclusion. If that is not the case then
door is open for continued (irregular) strength of the strong pair.
Consider this from Bloomberg:
Japan
views probable U.S. opposition to intervention in the foreign-exchange
market to address the appreciating yen as an obstacle to taking
unilateral action, according to three Japanese government officials.
Okay. Read through the lines on this. Not one but three MITI officials
have confirmed to Bloomberg that the US Treasury has said, “NIX” to the
BOJ Request for some assistance. Why would these three do such a thing?
They are pissed at the rebuke.
Yen
sales without U.S. backing would be a challenge, the officials said on
condition of anonymity because the government discussions are private.
The word “challenge” means: “This is not going to happen”.
I love when these guys talk like this. They acknowledge when they are
yapping that this is supposed to be sub rosa. When you break a
confidence like this you lose a friend. Tim Geithner knows who talked
and he won’t forget.
“This
time, Japan isn’t the only nation having trouble, and the U.S. and
Europe also have a fire under their feet,” said Takahiro Mitani,
president of the Government Pension Investment Fund in Tokyo, and a
former executive director at the Bank of Japan, said in an interview.
“In that environment, it’s not easy for Japan to gain support” for
intervention.
He is talking about Switzerland and the CHF. This time, a guy on the record says, “Not in the cards”.
There are big eco numbers and a holiday. The market is in risk on mode.
But that will swing too. When it does the market will lean on the
Strongs. We now know that there will be no coordinated intervention that
includes the US. Three guys told us that Geithner said, "No". So there is
now one less risk in this trade. Therefore it is going to re-appear.
One more thing from these talkers:
Volatility,
rather than the current level, would be a more likely trigger for an
end to the policy of refraining from sales of the currency.
It’s like they said, “We have to let it go and accept a stronger currency. We will only react if things get sloppy.”
Watch for the Vol to pick up. The market is playing chicken with the
Strongs. This talker has tipped an important hand. The market will not
miss it.
This is simple bruce. It's using what they want to get them to do something that's not good. The only way they can depreciate thier currency is to spit out gold reserves or dillute gold reserves with stimulus. This is a squeeze to try to get japan and switzerland to cough up gold as too many other places need it.
Why are covert trade wars like falling down a flight of stairs?
Because they always end up in debasement.
(bowing and fleeing flying shoes, garbage)
Yeah. That was cute.
:D
Sorry but even low grade pun humor can be just hilarious with the right ingredients.
+100
Bruce is right that coordinated CB/government intervention can change the game, and has done so from time to time, about once or twice a decade in recent history. Anybody trading FX since 1987 knows that.
Frankly, nobody expected the US to be up for that in these conditions. Nonetheless, kudos to Bruce for finding the strong evidence that the US has already told the Japanese to forget about it. Ozawa, the would-be PM, also said something similar.
Talkers Talking: Let's Play 'Who Said What'? Greenspan, Geithner, Volcker, Bernanke? Can you guess?
Key: 1. Paul Volcker 2. Alan Greenspan 3. Paul Volcker 4. Bob Roosa 5. Ben Bernanke 6. Dick Grasso 7. Tim Geithner.
It's a 'Between a rock and a hard place'type
of situation, Japanese CPI y/o/y already -1.8%
I hope these Bankers know the Hell they have damned us to
Last night on TV they say Israel is having peace talks with
Palistine .... They left out the part ... That Israel wants to
Attack Iran real real bad... they left out the real news..
USA sold Israel fuel for trucks and jets..
USA sold them bunker buster bombs...
TV news is failing the people of the USA ...
Good Report ... Things are coming apart...
Thanks for the post Bruce. Top notch as always.
My only thought is that US failure to cooperate here (possibly a payback for the stick in the eye jab that the US got at the G-7 confab earlier this year?) might be countered by the Japanese export market rotation to China rather than the implied boon to exports by selling stuff to the Japanese and Swiss.
In other words, this doesn't end well ... for anyone.
Bruce,
China = global imbalances, RMB pegged to a weakening / inflating USD gives the Chinese competitive advantage for exports over everyone.
Competitive advantage for exports = cocaine of cheap labor and a cheaper currency.
Amassing $2.5Tn in FX reserves while remaining pegged w / USD = enough is enough.
And here is where the master card comes in ...
At what point does a strong JPY threaten China? At what point do the Japanese SIMPLY BUY CHINA? They already are a huge investor and given their demographics, they need a labor pool outside of Japan ... and demand for product in the US has reached its limits and is decreasing ...
What happens if Japan sells UST to the FED ( no $ printing but balance sheet expansion) and BUYS CHINA? As the FED's balance sheet baloons, would it weaken the USD further? And then rinse, repeat by Japan until China cries uncle, and lets the RMB float? Japan gets to buy CHINA at firesale prices (40% discount to JPY two years ago) and China is forced to float its currency to protect itself. This forces China to consume more and export less.
If China repels Japanese investment then it would be game on for trade wars, and Chinese exports go down the tubes without the ability to jumpstart consumption further. Bad outcome for China.
The mechanics of market reactions would be summed up in one world : Volatility.
Newbie question; but why talk to Treasury - and secondly, since when has the YEN/$ intervention become a topic of controversy b/w these two, has it ever appened before?
OBAMA TO GEITHNER
http://williambanzai7.blogspot.com/2010/08/obamas-blackberry-job-hunt.html
Love it..WB. It may be in my dreams but I sure would like to see the mug when I did the fundraiser come to fruition.
I rise in support of Mr. Beale.
I have lived plenty long enough to see CB intervetion, even coordinated CB intervention, in the Forex markets, get absolutely run over. As in, like a steamroller over a cat. A dead cat.
(that's not a slam on felines, I like them)
The currencies involved, every one of them, will get to where mass psychology dictates they will go. The Central Banks can delay this, maybe, but not for very long. Forex is just too big.
Well, yes and no. Old style intervention, whereby CB calls handful of banks and corodinates selling tends to have a short term effect, but has it's limits. In our new and improved world, the power of Quantitative Easing to print money means that they can consider much more aggressive actions. They could also consider using proceeds to buy hard assets (and not just gold), which would nullify any "beggar thy neighbor" moves by other CBs. Of course, what is restricted them is the risk of loss of faith in all currencies and the other thing which is hugely important right now, the shortages of food stuffs, esp wheat and rice. CBs could screw this up so badly that although their exporters are competitive, the workers are going hungry.
yep.
I've been trading since 1987 and CB intervention has never done a thing long term--just scared out shorts or longs short term. There's no point in discussing it, Bruce. The market is bigger than the CB's and they can't stop this train.
"Nations" are not "having trouble": governments are...
gubbermints equally belonging in quotations of course
never trade forex,, never bother.. so
cant understand how country w/ 200% gdp/debt,
w/ gov deficits equal 100% percent ( tax revenues =budget deficit)
,w/ aging population and lowest birth rate can have strong currency
for some period of time... beyong imagination..
if Japanses woory about weak yen why cant they
print bonds ( as they always do ), and sell them, lots of them..
after either yen will weaken, or %rates will shoot up...
isnt it what they want ?
alx
w/ aging population and lowest birth rate can have strong currency
People just will not realise that the ROI of population growth in a fully industrialised society is solidly negative!
Only countries relying mainly on conquest for their upkeep needs population growth so they can forge armies and loose the surplus in wars with the competition.
ASK NOT WHAT YOUR CENTRAL BANKS CAN DO FOR YOU, BUT WHAT THE G-20 COUNTRIES CAN DO FOR THE FINANCIAL STABILITY BOARD.
Japan and Switzerland wouldn't be having these problems if they had ex-GOLDMEN in the ranks of their central banks.
I don't understand why the BOJ would need the help or approval of the Fed in order to control the value of the yen. After all, isn't China able to peg its currency to the dollar without any help from the Fed? What help is the BOJ requesting from the Fed? Are they asking the Fed to increase interest rates in order to strengthen the dollar?
In times past, I think that Japan would have weakened the yen by selling a lot of JGB's, used the proceeds to purchase dollars, and used the dollars to purchase US debt. Could it be that the Japanese government feels that it may be reaching the limits on its ability to borrow?
I agree that the situation could get ugly. If ordinary Japanese citizens feel that there is nothing to stop the rise of the yen, then they would be tempted to sell their overseas assets and purchase yen (joining every FX trader in the world). This would be terrible for Japan and would not be good news for those of us in the US who have enjoyed all of the wonderful autos and electronics products that the Japanese have been sending us all these years.
this is a very profound insight. indeed China is the "problem" because as Joe Jackson famously sang "they're steppin' out tonight." What to do with a nation of 1 billion growing 8 percent a year without really "breaking a sweat"? Obviously the answer in the USA is to "devalue the dollar," right? Well how about NOT SO obviously. They're growth is feeding an inflation here at home. And of course "you all don't live on the farm anymore." So even though "farm John and his big Potato" are raking in the money everyone else in the USA is suckin'. Insofar as this relates to Japan, well, isn't it obvious? Who is Japan's primary competitor? It ain't the USA that's for sure! It's the folks (China and ALL of East Asia excluding Japan) who are using "the Japanese model." In short it's my opinion that the Japanese are saying, "we need an uber yen lest the Chinese get all that quality American shit."
Japan needs the U.S. because Japan knows it cannot win a devaluation contest v the U.S.
In other words, Japan knows the U.S. is printing and inflating dollars right now. It needs the U.S. to stop in order for the Japanese intervention to succeed.
The U.S. clearly told Japan forget it.
Print away, Inky Timmy.
deep thoughts on shallow pockets
that's good soap bruce
way to dig brother
Consume mass quantities!!
If the BOJ just had a benchmark where they would openly purchase gold if the Yen went past a certain point against the dollar, would that not automatically put pressure on the dollar ?
It might stoke dollar inflation fears which would force the Fed to hike rates.
Very interesting idea!
A commodity price rise, as RoRoTrader pointed out, would also create inflation fears in that the USD would have to rise just to keep up with price of oil and copper. (Can we just forget about gold for one thread...please?)
Prices would rise at home, thus stoking more inflation fears. But those are only inflation "expectations." Real inflation will only occur when there is upward wage pressure, as well. Unfortunately, with unemployment not getting a whole lot better (only to be belied by tomorrow's UE number, coming in much better than expected...), there can be no real wage inflation pressure.
One "positive" on that side was the decrease in productivity units. I think Santelli said that that was the first time in like nine months that productivity has decreased, which can only mean one of two things; a.), the US worker is telling his boss to piss off, he ain't working any harder for no more, or b.), there ain't no work to be done. Personally, I think the worker is taking a time-out.
If the case is indeed that there is too much work and workers aren't going to work any harder for effectively less pay, then wage pressure has a good chance of occurring. Otherwise, with that one possible plank out of the way, it could be bon voyage to any sort of inflationary scenario, all "expectations" aside.
"Work smarter not harder" was meant for the bosses not the employees. Get them to do more for less. Want to keep your Job? Then you have to work Saturdays...and oh, by the way, these will be no pay for the overtime. YOU think the worker is taking time out? Time out for what? Folks who have it 'made' already' or a nice cushy government job or in an industry that is avoiding the recession (so far), don't get it any more than the talking heads in the media or our blind leaders inside the beltway.
Productivity is in trouble because buying power has been removed from the buying and consuming public. (you can discount the sound bites things are looking up at Best Buy and Home Depot, etc.). The majority of americans are not even making ends meet, and the idea that gas can go up one penny just sent 100,000 job seakers back to bed because they can't handle the increase. The people are not cows nor robots, they are not a fact or figure on a piece of paper...they ARE the nations raw commodity and getting pissed away. How american.
Folks talk about the effects of fx multiplying factor, the turn over of a dollar and how its multiplies the power. Well, take that same penny of increased prices and it to multiplies multifold. One penny of copper ingot increase ends up being .50 at my end and buy the time that penny increase hits the consumer it is a dollar....those 30% to double mark up as each touches the commodity adds up fast. Think about that when you try to consider how the Nation is going to deal with getting back on its feet. Think about that when you think of how these governments are trying to keep their currencies above water.
I just love how one can read or hear someone (including the so called experts) can see around the corner or judge the effects of an item as a stand alone occurance. Everything is connected to everything else, and this last squeeze to get the last penny on earth is going to leave the winners with a burnt out cinder to gaze upon. You can take that to the bank.
I stopped reading there. You better go invest in Mongolia, they have 25% inflation.
+1000
anybody buying and holding gold threatens the dollar, and all the other fiats for that matter.
That would be me, bitchez!
Had to say that, you set me up...
Japan is well and truly fucked if the yen keeps rising. I had read that, for example, for every yen the dollar drops, Toyota's operating profits fall 2%.
Source: http://www.time.com/time/business/article/0,8599,1722557,00.html
Zack,
True but... Japanese companies who can afford to keep their profits in dollars, they do not repatriate money until the Yen weakens. They also use the strong Yen to buy materials parts and supplies from non-Japanese sources. BOJ is rumored to signal to the keiretsu's when to do that.
Our company in Peru buys ball and roller bearings for the automotive after market, almost all of what we buy is from Korea and Japan.
The Japanese bearings manufacturers are hurtin'... They have to raise prices because of the strong Yen despite bad economic conditions in most of the world.
Eisuke Sakakibara has been expressing that exact sentiment on at least several occassions over the past several weeks.
And, if the BOJ were to intervene then intervention is most likely to be most effective if BOJ starts buying the 10Y JGBs, and according to what I have been reading the Japanese seem to be playing a game themselves by pretending at threatening intervention to keep the markets off balance, but are at the same time reluctant to be buyers of their own debt.
One reason for reluctance may be the fear of triggering a wave of commodity price inflation, and the BOJ buying Japanese debt may be the match that lights that fire.
Excellent piece Bruce, but don't you think that CB interventions against the flow of the market are generally losing and futile action?
Thanks for the comment, Ro.
So if the Japanese begin selling US Treasuries (or...how else are they going to pay for it?) and buy their own debt in order to spark inflation, what happens then to the:
US 10Y
Nikkei/SPX
USDJPY
CHFJPY ?
Any enlightenment would be greatly appreciated. Thanks.
:D
Hey Orly,
Trying to figure it out myself by verbalizing what I think are the salient points I have been picking up from people a lot smarter than moi.
To further the point made about the BOJ intervening through purchases of JGB 10Ys the Japanese PM Kan was quoted just last weekend and after the Jackson Hole as saying the govt intends to cap bond sales so if so then that nixs the BOJ buying 10Ys unless I have completely lost it.
It looks like the BOE has already been buying up what some other countries have been dumping (presumably China) since the BOE's treasury holding have jumped significantly form $85B to $about $350B in short order.
TD wrote today that the FED is only $60B away from becoming the largest holder of UST and TD expects that number to rise by another $1 point something Trillion over the next 6 months so I suppose to answer your question about Japan; do like the FED, just print money out of thin air and buy your own debt.
That's the inflation trigger. That's why prices ran up in 2009. Everything crossed against the dollar went up as the FED printed and the dollar fell.
If the FED prints it looks like a runnup for the Nikki and SPX, at least initially. It looks to me as if the market expects it. If the BOJ does not intervene which appears likely then I am looking to short USD/JPY, EUR/JPY........don't follow CHF/JPY.
Politically it may be very diificult for American politicans to endose a coordinated intervention with BOJ just before mid terms. Try explaining that to voters.
It all seems to be getting very complicated as the FED becomes more and more the primary risk to natural price discovery.
I meant about the UST bonds that if the Japanese were selling their long-term bonds (and I don't know whether that is even an option for them..) in order to use the proceeds to buy JPGs, wouldn't that put pricing (short...), thus yield (long...), pressure on USTs, thus sparking inflation in both Japan and the United States simultaneously?
"That's the inflation trigger. That's why prices ran up in 2009. Everything crossed against the dollar went up as the FED printed and the dollar fell."
It was vital for the Fed to perform the actions it did, according to their agenda, because US equities and everything valued in USD were going into the toilet and fast. Grayson grilled Bernanke on the half-trillion U$D that went to the Bank of England and the Eurobanks in order to prop up everything crossed against the USD.
Now that most of the intial pain has subsided, wouldn't you think that USD crosses would have normalised by now? The yen and the CHieF at all time highs against the dollar...just doesn't make a whole lot of sense in that way. If both the USD and the JPY are the ultimate safe-haven currencies, then why the disparity between the relative vaue of the USD and the JPY versus their respective crosses? One at all-time highs and one at all-time lows.
I just can't wrap my skull around that.
I apologise for talking to myself but...
"It looks like the BOE has already been buying up what some other countries have been dumping (presumably China) since the BOE's treasury holding have jumped significantly form $85B to $about $350B in short order."
I have been thinking that this is the way the Fed has required payback on said FX Swaps. We would buy Pounds if, later, the Brits would do our international monetary bidding. If draining the Chinese swamp of their excess Treasury reserves, to the tune of increasing their foreign reserves some four-fold is the price, then the GBP will have to pay the price.
This is all starting to sound like one wicked circle-jerk to me. I am just trying to follow the bouncing ball as best I can.
And if, as you say, the Japanese minister has stated that volatility is the one key factor in their decision making process (I mean, aren't they hedged in some way?), then all that is needed to force the hand of the Japanese central bank is to create volatility in some way. Commodities, ironically, would be the easiest route to that end.
Seems like another Catch-22.
And thanks, Bruce, for yet another head-scratching, oh-my-god-did-I-really-just-get-long-on-that perspective.
Great work. Thanks.