Yen

Earlier, the Japanese government approved the BOJ decision to monetize in addition to the traditional JGB securities, also ETFs, REITs, and BBB and higher-rated bonds. In other words, the BOJ is now permitted to do what the Fed will have authority to do with a few months: buy virtually all risk assets, as buying ETFs is the same as buying the general market courtesy of the most traded security in the world, SPY, to push and pull the entire market in whatever direction it goes. There are two questions at this point: is the BOJ allowed to buy foreign (read US) assets that fall under the above buckets, and whether the FX currency swap line recently established with the BOJ will allow the Fed to use Japanese proxies to monetize various US assets. Or will the Fed first seek input from the BOJ on how to proceed with sending the Dow to 36k.

The BOJ has now learned the hard way that these days $20 billion doesn't buy you much: specifically - about 20 days, and a Geoffrey Raymond painting of Ben Bernanke running naked behind the US dollar with a chainsaw and a homicidal grin. The USDJPY is now back to where it was when Shirakawa injected Y2.125 trillion, only to see the impact trickle down to nothing. Considering Monday's BOJ action did nothing to weaken the yen, it is almost certain Shirakawa will pull another $20 billion rabbit out of his hat: this time we expect the impact to last at most half as long as the last time.

Obama said he would be “very interested” in finding ways to lower the corporate tax rate so U.S. companies operating overseas aren’t disadvantaged so MORE FREE MONEY for our Multinational Masters and Bernanke said he refuses to be out-eased by Japan and he's got a whole fleet of helicopters lined up to dump money on our Multinational Masters as well.

Bonus question? What's the prize?

After much speculation and many flying rumors, Japanese government stepped in and intervened--sell yen, buy dollar--for the first time in six years. But the bigger question is whether this would achieve the ultimate goal--pushing export and domestic price levels high enough to help fight deflation--which has plagued the country for a decade.

• Japanese PM wins party vote; will stay in power.
• Asian commodity stocks rise on growth hopes; Japanese shares fall on Yen.
• China's currency advances to a fresh high against the U.S. dollar; CB sets the yuan-dollar parity rate at 6.7378.
• China plans to introduce credit-default swaps by year-end, Official says.
• Euro rises against dollar in morning European trading to $1.2877.
• European industrial production stagnant in July.
• EU raises 2010 growth forecasts; warns growth likely to slow in H2.
• German investor confidence may decline to 18-month low as economy cools.
• Bank of America should repurchase $20B in mortgages, Insurers say.

All eyes are glued at Japan tonight to see who the new DPJ leader will be. As of last check the race was in its photofinish stages, with both Kan and Ozawa having an identical number of supporters. Should Ozawa win, there is an expectation that the new PM would engage in major Yen intervention, and rescue the toothless BoJ from the peanut brittle of its utter worthlessness, and since the volumeless and robotized 2nd derivative of the AUDJPY known as the US stock market trades tick for tick with the JPY, the first indication of Ozawa taking a decisive lead should send the futures limit up at 9Gs. Regardless, even if Kan remains in power, with so much of the fate of the free world dependent on the most irrelevant variable imaginable, here is an outlook on the Yen from Marc Chandler, head of Global FX Strategy at Brown Brothers Harriman, who however sees continued strength for the JPY in the near future, which means that even more stat arbs will explode over the next few weeks as stocks continue to correlate only with the Ambien consumption of one Phillip Hildebrand. "The unwinding of the previous yen carry trade is playing out and although the private sector is purchasing a large amount of foreign assets, roughly the same amount was tried previously (by the BOJ) and, it too, did not work. The stemming of the yen’s appreciation will require greater export of capital from Japan. Short-term speculative capital flows and other flows not picked up in this sketch are difficult to ascertain, leaving it difficult to generate an estimate of the magnitude of capital that needs to be exported from Japan. However, if the will was there, the Japanese government could step in to address the market's failure to sufficiently export Japan’s surplus capital."

The past three days of Risk On market action are all gone and forgotten, as the 250 pips of "BoJ FX intervention" have to be eliminated. As a result the USDJPY is 130 pips tighter compared to 8 hours ago, down to 84.6, and the AUDJPY and futures have followed suit. On the other end of the risk spectrum, the EUR is dropping like a rock, across every currency in the world, is testing 1.27 against the dollar, and is back down to a 1.30 handle vs the CHF. Elsewhere, Bund stops were triggered as the German bond futures hit fresh all time highs. All those who were expecting the rotation out of bonds and into stocks to begin, and bet accordingly, our condolences. Feel free to blame the BoJ.

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.