Yen

The BoJ just released a decision to extend the 3 month lending program to 6 months, to expand the 6 month fixed rate facility to 30 trillion yen from 20 trillion, extended the maturity of QE, and kept the benchmark rate at 0.1%: in essence a nothingburger extension of QE, which has done miracles for the past 20 years. The key item, however, is that there was no direct mention of FX intervention by the BoJ, which was the silver bullet many had hoped for. As a result, the Yen is currently surging.

Is the real yield for the Japanese yen actually to 4.1%? The yen strength will eventually end, because while gold cannot be created out of thin air, currency can. Expect a massive quantitative easing that sends the printing presses into triple overtime.

My conclusion is that the only possible way for the Nikkei to appreciate (in JPY terms, as quoted) and the Nikkei to depreciate in USD terms is for USDJPY to appreciate. People have been talking a lot recently about the BOJ possibly stepping up in the market to stop the JPY appreciation but it is believed and they have hinted that these levels are not necessarily a concern for them yet. However GDP data disappointed quite a bit, and this could be the boost in terms of public opinion and political capital for intervention. Whether it is by buying calls on Nikkei or buying USDJPY between 85.00 and 85.40 with a stop on a daily close below 83.50, I think this is a great opportunity especially for traders who are already short US/European equities and/or short AUD and emerging currencies. A breakdown of this USDJPY / S&P correlation would be very interesting. USDJPY also trade in line with 10Y US yields traditionally, and they on the other hand keep dropping like a stone. Something has to give here and personally I believe it could well be the JPY. I feel better about this call since everyone I floated the idea to seemed to think I am crazy. Usually contrarian trades have a way to come to fruition when no one thinks they will. I would keep an eye on the 10Y Japan CDS as well for confirmation. To me it looks like Japan is about to make a move in the race to the bottom.

Insomniac market observers everywhere are watching with stunned horror at what is going on in Yen crosses, and thus futures markets. Per preliminary market rumors, the JPY is plunging following BOJ FX intervention, and picking the pockets clean of trend speculators everywhere. Unlike the SNB, which specs have grown to love and ridicule, as every €10 billion CHF intervention attempt is neutralized in the span of hours if not minutes, the BOJ is a far more reputable, and deadly opponent. And with implied cross-asset correlation at 1.000, and the only driver of all risk on or off being the YENXXX carry cross, the plunge in the Japanese currency is forcing a massive squeeze in futures, which were halfway to the moon at last check. This will prove especially painful for those who shorted the market on IBM's and TXN's misses after hours, and went to bed, only to wake up and find themselves with a several million dollar hole to fill, a barrel-sized vat of vaseline to make the pain a little more bearable, and an IOU to the BOJ. Bloomberg was kind enough to share some insight: "The yen declined for a second day against the dollar on speculation Japanese authorities may intervene to weaken the nation’s currency after it climbed to a seven-month high last week. “The strengthening of the yen has added to pressure on the BOJ to implement more reflationary policy,” said Mitul Kotecha, Hong Kong-based global head of foreign-exchange strategy at Credit Agricole CIB. “The risk is for a shift higher in dollar- yen in coming sessions from oversold levels.”

Japan takes a bold step toward moving away from second to last place in the currency devaluation game. Bloomberg reports:

The Bank of Japan said it will pump 2 trillion yen ($21.8 billion) into the financial system after the Greek debt crisis caused instability in financial markets in the U.S. and Europe.

The emergency measure represents the bank’s first same-day repurchase operations since December. The balance of current- account deposits held by financial institutions at the central bank will likely increase to 16.9 trillion yen, up 800 billion yen from yesterday, the central bank said.

Of course, right now Ben Bernanke an d the US dollar are dead last in the fiat bonfire. But not for long.

Luckily, the only real winner out of the Keynesian death rattle will be gold. Which is the LBMA is doing all it can to manipulate the price lower right this instant. All the better - entry points will be fewer and harder to come by as the time to the final Keynesian unwind draws nearer with each passing day.

I can't wait to find out what happened. Just a guess.

Here is the reason for the surge: all day everyone sold off yen and bought whatever risk assets they could find. The carry trade is back. Risk on. As equities surged higher, all the new found money had to be put somewhere: just as equity indices stormed higher so HY rushed back to the day's highs. Stocks, bonds, who cares - buy it all. In the meantime credit is once again scratching its head at the lemmingness of stocks. Even with Goldman stock rising by $2.50, its CDS was 7 bps... wider! Nothing makes sense anymore. Sell yen, but whatever crap you can still get your hands on. The crappier the better. Obama said so.

Want to orchestrate a melt up? Here's how - 1) Make SPY hard to borrow; 2) force shorts in one of the top 5 most traded stocks in the world to cover wholesale, 3) kill the yen. Like literally. The chart below shows how the entire world is gang raping the Japanese currency as the carry trade all clear is given despite the imminent auction of Mykonos ($0.01 initial bid)... and of course 4) swear in Ben Bernanke as Chairman of the Fed for another 1,000 years. In the meantime, Dow 36,000 in 245 days.

The carry trade rout is accelerating, even as the euro keeps hitting new spec short records. After the prior week's (March 23) net short exposure hit a new record of -74,917, net euro shorts hit a new all time record of -85,326. This is occurring even as the cable saw last week's record shorts of -71,624 tighten marginally to just -67,073. Yet the biggest stunner was the whopping collapse in Yen net short positions, which moved from +10,161 to -30,866: the biggest net short in the Japanese currency since 2007. This is happening just in time for the Yen to hit fresh 7 month lows against the dollar, as the Yen is back to being the funding currency for all carry trades. The one currency which is openly being sold by its central bank, the CHF, saw shorts increase by 5.5k from -1,088 to -6.540.

With the world’s weakest major economy, Japan is certain to be the last country to raise interest rates. This is inciting big hedge funds to short yen to finance longs in every other corner of the financial markets. The world’s worst demographic outlook assures problems will only get worse. They’re not making Japanese any more. The sovereign debt crisis in Europe is prompting investors to scan the horizon for the next troubled country. Japan is at the top of the list. The Japanese long bond market, with a yield of 1.4%, is a disaster waiting to happen. (YCS).

A home run begging to get smashed out of the park. Support is falling away like a dress off a prom date. Puts are still ridiculously cheap. The global carry trade is back on. The Japanese government absolutely hates the yen at this level. Exporters are getting killed. Moving Mount Fuji to get what it wants. The world’s credit sharks are looking for a new victim. Final target: ¥150. (YCS)

According to the CFTC's Commitment of Traders report, non-commercial speculative shorts in the Euro declined for the week ended March 2, and for the first time in over two months, tracking the move of the EUR higher over the past week. Total net positions declined from -71,623 to -66,770, or a net long increase of 4,853. This is still the second highest net short exposure in over two years.

On the other side, a stunning push in Yen long exposure increased the net long Yen positions from 1,717 in the prior week to a whopping 32,552. The next question: will Japan promptly ask all these speculators to performSeppuku after they have done all they can to make the Yen more expensive, thus laying Japan's best laid plans to stimulate inflation to waste.

The third most relevant currency, the British Pound, saw a net short increase, with net short Non-commercial contracts increasing from -64,647 to -67,549.

After several weeks of driftless correlation between stocks and the DXY, stocks are once again correlating almost perfectly with the critical EUR-JPY pair. Due to the acute impact on the DXY via the EUR-JPY, this is the easiest way to push around the DXY levels. Furthermore, the correlation return could be indicative that the JPY is once again the carry currency of choice. Couple this with a weakness in the short-end of the UST curve, and one can speculate that carry traders are quietly repurchashing dollar shorts and selling Bill positions, meaning that the Yen will likely be seeing rather substantial weakness in the coming weeks.

Trying to read between the lines of BOJ doctrine, even as the Yen continues rising contrary to what the economic data out of Japan time and time again suggests it should be doing, Morgan Stanley is out with a report that attempts to quantify the probability of a Yen intervention. And even though there has been no official instances of intervention since 2004, MS feels that "increased JPY strength from current levels is increasingly likely to trigger official FX intervention." As this relates to the economy caught in the biggest deflationary vise in the last two decades this does not surprise us very much.

The Japanese posturing worked: with the yen hitting a 14 year high against the dollar, inside of 85, one short week ago, in the past 5 days the Yen staged a huge drop against the US currency, plunging by the most in over a decade, to 90.5 as of Friday close. While we are not sure what Hirohisa Fujii told Bernanke on the closed line in the past week, we do owe the boys at 33 Liberty a golf clap for managing the carry roll from the dollar to the yen with such efficacy that the stock market did not plunge. It appears the $ Plunge Enforcement Desk and the S&P Plunge Protection Desk have reached a phenomenal level of synergies.