Yen

All you need to know.

I go schizoid.

Following the USDJPY touching on a fresh post-WWII low earlier today, not only has Noda made the transition from simply watching to outright panicking to being on suicide watch, but the BOJ has finally freaked out (something we predicted back in April only to be just 6 months ahead of the curve). Case in point: the Nikkei just reported that the BOJ "will discuss additional monetary easing measures to help blunt the mighty yen's impact on the economy when its policy board convenes for a meeting Thursday." Specifically, the BOJ may (read) will, expand the existing 50 TRN yen asset-purchase program by 5 TRN yen, and also may consider the purchase of bonds of more than two-year maturity, thus expanding scope of program and converting it into Japan's own Operation Twist. In other words, printing goes to Japan, now that it is widely expected that no matter what Europe does, the outcome will be one of EUR weakness. Everyone knows the proclivities of the deranged Chairsatan (and for those who don't just observed the dramatic backwardation in Crude observed here first yesterday), which only leaves Shirikawa. And he has just had enough. Which in turn explains the surge in gold: with the entire world once again entering hyprintspeed mode, the only safe repository of value is now exclusively gold (sorry CHF, you are no longer relevant: thank Hildebrand and the goonies at the SNB who are quietly padding up the asset side of their balance sheet with hundreds of billions of soon to be even more worthless euros).

The USD just dumped across all major pairs after the recent support in the USDJPY at 76.65 was just broken, leading to a huge plunge first in the Dollar-Yen, to a fresh post WW2 lowm and then in all other pairs. It is unclear what is driving this: probably some combination of QE3 expectations and technical trading now that the bottom has been taken out. The signal is irrelevant: it all originates at the central banks these days anyway. Expect imminent chatter of BOJ intervention to protect its exporters.

Timber time. Next up: another round of hopeless and very much helpless BOJ intervention. Because after the FX wars come the trade wars, and after the trade wars come the shooting wars.

For an early look at the risk aversion gripping the market look no further than the USDCHF and the USDJPY, the first of which just took out 0.75, and the second now almost at BOJ intervention levels. Ironically, since the math Ph.D.s have still not recalibrated their models, it is very likely that the collapse in the dollar will lead to an explosion in ES courtesy of the inverse correlation, which will once and for all confirm that global capital markets and now nothing but a robotic circus.

After a brief intermission in which even the robots apparently took some long overdue shut-visual sensor, things are back in motion, with both French and Italian CDS pushing out to record wides, France hitting 150, 7 bps wider, while Italy rising 15 bps to over 405 bps at last check. And what is more disturbing for all those who keep pounding the table that Spain should blow up first dammit so stop looking at Italy, Italian 10 Year yields just surpassed those of Spain, for the first time since April 2010. Elsewhere, as Bloomberg reports, the Yen has resumed its rally as the BOJ, has ceased its intervention after spending over Y4 trillion according to some accounts, only to realize what we said from the beginning: the yentervention will fail. "Both BOJ and SNB have made clear they oppose further currency appreciation but absence of other safe-haven alternatives means the yen and swiss franc will remain in demand", Lutz Karpowitz, strategist at Comerzbank, writes in note. And some more observations courtesy of Bloomberg: "Confidence is waning over EU policymakers’ ability to contain debt crisis, Derek Halpenny, strategist at BOTM-UFJ writes in note. These will make it all the more difficult for BOJ to find intervention success in yen. Without further BOJ intervention, intensifying risk aversion will result in further yen gains, Halpenny adds." What is ironic is that the Italian stock market is rebounding rapidly from overnight lows of -3.and 5%, is now green courtesy primarily due to alleged additional ECB bond purchases of Italian bonds, which rumor has in turn stabilized Italian financial stocks which are, as expected, soaring. We are confident this response will be as transitory as all other central bank interventions.

• Japan Intervened in Yen, Nikkei Says
• Japan Intervened to Sell Yen, Finance Minister Noda Says
• Yen Falls as Much as 1.8% to 78.43 Per Dollar After Intervention
• Japan’s Intervention Was Unilateral, Finance Minister Noda Says
• MOF sold under Y500 billion in intervention: 2 dealers
• Noda Says He Hopes Bank of Japan Will Take Appropriate Actions

Just like right after Fukushima the USDJPY waited for the illiquid 5pm session to collapse, here comes part two. Have the FX HFT algos now completely taken over? A 100 pip move is catastrophic for most levered FX desks. It is time someone figured out what is casuing these periodic plunges. Sure enough, someone will gobble this up and hopefully make some money, unless there is actual news that just sent the Yen to near all time record highs.

The BOJ just concluded its two-day operation, and while not announcing any new monetary program or changing its interest rate, both of which had been widely anticipated, it did announce a new Y500 billion loan program for "growth industries" the result of which is some substantial strength in overnight equity markets. Alas, just like everything else by BOJ terms, this stimulus will prove largely insufficient, and will be followed by yet another loan program, until finally Shirakawa relents and restarts the printers. And in other ridiculous news, the BOJ raised its outlook of the second half, saying the economy was "picking up." There is no point in even commenting on this, suffice to say that instead of engaging in what it does best, i.e., monetary stimulus, Japan, and of course the US, will now be delighted to live in bizarro world that things will improve on their own. Best of luck with that.

Starting at 9pm Eastern, something lit up a fire under the Japanese Yen, sending all pairs, but specifically the USDJPY and EURJPY down sharply for no apparent reason. At last check the Dollar Yen was back under 79.85, the level at which the BOJ 3 months ago had to run like a petulant, crying child to its pedophile uncles from the G-7, begging for a rescue. The only mildly related news came out just prior when it was announced that China's net purchases of Japan debt hit a new record in April. From Bloomberg: "China’s net purchases of Japan’s long-term debt reached a record as the larger nation seeks to diversify the world’s biggest currency reserves. China bought a net 1.33 trillion yen ($16.6 billion) in Japanese long-term bonds in April, the biggest amount since records began in January 2005, according to data released today in Tokyo by Japan’s Ministry of Finance. The nation sold a net 1.47 trillion yen of short-term debt, the data shows. “As China tries to diversify its assets with its huge foreign-exchange reserves, it probably wants to have yen- denominated assets to some extent” in the longer term, said Tetsuya Inoue, chief researcher for financial markets for Tokyo- based Nomura Research Institute Ltd. “China has a strong trading relationship with Japan." If anything this would be dollar negative, not so much Yen positive... We will follow and update if anything is noted.

The euro climbed to a three-week high versus the dollar on speculation Germany and other European nations may pledge more funds to bankrupt Greece and favourable German economic data. This is more a reflection of dollar weakness rather than any great confidence in the euro. The euro at €1,068/oz remains under pressure versus gold and is less than 2% from record nominal highs at €1,088/oz. While the focus, has of late, been on the increasingly ‘unsingle’ single currency, news overnight shows how there are also substantial risks posed to the yen. Moody’s have warned that they may have to downgrade Japan and have warned of a “tipping point” which may lead to a government funding crisis for heavily indebted Japan. The United Nations warned on Wednesday of a possible crisis of confidence in, and even a "collapse" of, the U.S. dollar if its value against other currencies continued to decline. The UN’s mid-year review of the world economy did not get covered widely. The UN economic division said that a crisis of confidence in the dollar, stemming from the falling value of foreign dollar holdings, would imperil the global financial system. This trend, it said, had recently been driven in part by interest rate differentials between the U.S. and other major economies (see table above) and growing concern about the sustainability of the U.S. public debt, half of which is held by foreigners including the Chinese government.

It was to be expected: as of the just released CFTC Commitment of Traders data, the net exposure of non-commercial EUR longs, arguably a bubble far bigger than gold and silver combined, in terms of volume and participation, tumbled from 99,516 to 61,447 long contracts, or a nearly 40% drop in net short positions in one week. And this is happening even without the CFTC hiking margins. Notably, Yen shorts have now abdicated, and following its drop into steep negative speculative territory, when it hit -52,983 contracts on April 19, it has now moved into the green, adding 32k contracts to a total of 13,054. Lastly, and not at all surprisingly, the gradual contraction in bearish dollar bets continues to abate, and at a just barely negative net position of -4,563, the USD is now back to February 2011 levels. It appears that the great unwind of the USD short trade is almost over, and from this point on it will be just the retails, the momos and the robots.

Even as the dollar is plunging to fresh 3 year lows and was on the verge of crossing 1.50 earlier, the inverse is happening with the former carry trade darling, the JPY. As of a few minutes ago, the Yen was up to 80.49 against the dollar: a massive 500+ pip surge from over 85 in early April. More importantly, this is the level where the G7 intervened to weaken the Yen back in March after the Nikkei flash crashed. The question then is: will the G7 and BOJ intervene once again to do whatever they can to dilute the Yen (don't forget - Japanese monetization is coming with a vengeance), or will it let go sub-80 again at which point the Mrs Watanabes of the world will be forced to once again close all their unprofitable shorts and send the Yen surging to another all time record high against the dollar. Of course, for that to happen, it would mean the dollar will likely be forced to weaken even more. Then again, the opportunity cost is an even greater economic plunge in Japan in Q2. And just like that the global central planning Committee is caught between two pingponging carry currencies. Luckily, for the time being, Americans continue not to care that their "reserve" currency has all the credibility of toilet paper in the international FX market.

It is one thing for sellside research, caught in its traditional lemming frenzy, to cut national GDP outlook. In the case of Japan the resistance to reality provide futile early on and based on the average of 43 economists' forecasts, economic growth is now expected to post a 0.22% GDP decline in Q1 and a whopping 2.83% in the April-June period. As had been predicted this is not surprising. What is surprising, is that the head of the BOJ, Shirakawa-san himself has now indicated that Japanese growth is stalling. Per the WSJ: ""We are now expecting production and GDP will decline in the first quarter and the second quarter," Mr. Shirakawa said in an interview on Friday. It is rare for the central bank governor to make such forecasts and is the first time that Mr. Shirakawa officially admitted the likelihood that the economy may shrink in the first two quarters of the year, in line with many private-sector economists' predictions." So for those wondering who will take the temporary lead in money printing in the brief period between QE2 and QE3, look no more: "given high uncertainties surrounding the Japanese economy, many analysts expect Japan's central bank to be eventually forced to take additional easing steps." And just how much money printing are we talking here? "The central bank currently buys ¥1.8 trillion of long-term JGBs every
month from financial firms as part of its regular market operations. The bank's hands are tied by the so-called banknote rule, which
limits long-term JGB buying to the amount of banknotes in circulation.
But the central bank still has capacity to purchase around ¥20 trillion
of long-term bonds, according to the central bank's latest account data." In other words, lots.