Yen

Seven years of zero rates, massive monetary inflation and incessant market backstopping have desensitized and anesthetized. Rational thought ultimately succumbed to "perpetual money machine" quackery. And now all of this greatly increases vulnerability to destabilizing market dislocations, as senses are restored and nerves awakened. "A lot of this looks like late 2007 or early 2008," warns one manager, but today, market mispricing is systemic and global – virtually all securities classes at home and abroad.

At the moment, the strength of the USD correlates very strongly to equities. When King Dollar is torpedoed like it was yesterday, stocks plummet. So does this mean that a rate hike next week will be tremendously bullish for stocks?

After yesterday's rollercoaster session in both the S&P and in oil, where initially stocks soared alongside oil, only to promptly tumble as stops were taken out and as the refiners' inventory strategy was exposed after the DOE's latest weekly numbers were released, it has been a quieter session so far, though maybe not for China where stocks jumped at the open only to fizzle and close at the lows in what appears to be ever less intervention by the market manipulating "National Team."

• Anti-Trump Effort Launches Super PAC (WSJ)
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• OPEC Takes Down Oil Majors as Lower-for-Even-Longer Kicks In (BBG)
• Chinese Companies Are Trapped in IPO Logjam (WSJ)
• Republican Ted Cruz vaults into first place in new Iowa poll (Reuters)

Overnight Goldman "concluded its review" of where the EUR will go in the medium and long-term, when Robin Brooks announced Goldman is now "Scaling Back our Expectation for Euro Downside" specifically saying the firm revises its forecast for EUR/$ to 1.07, 1.05 and 1.00 in 3, 6 and 12 months (from 1.02, 1.00 and 0.95 previously) and lifts its year end-2017 forecast to 0.90 from 0.80. The result of Goldman's increase in its EUR forecast? The EUR promptly tumbled below 1.08

"While funding continued to be available, such a large negative basis indicates potential market dislocations. And this may call into question how smoothly US dollar funding conditions will adjust in the event of an increase in US onshore interest rates. Similar pricing anomalies have also emerged in interest rate swap markets recently, raising related concerns."

"Today’s sell-off in Bund yields (Exhibit 2) and the bounce in EUR/$ rivals those seen in April and May and again puts the question of ECB commitment to QE firmly on the table. ... We are placing our forecasts under review."

They aren`t about to stand for a strong dollar in a world where it is a competitive advantage to devalue currencies from a multinational profits, tourism and global trading perspective.

Yesterday's market swoon which unwound all of Tuesday's gains on concerns about a hawkish Fed and fears about terrorism in the US, are now completely forgotten, and have been replaced with the latest daily round of pre-ECB euphoria, driven by hopes that Mario Draghi will announce even more dovish details to Europe's Q€ 2 than just a 10 bps rate cut and a boost to QE more than €10 billion, both of which have been already priced in.

The EU’s political leaders and other elites are committed to holding the European Union together. To them, united Europe is an article of faith. They hold the idea with as much ferocity and fervor as any religious belief. But while the European Union is a wonderful political idea, it’s economically terrible. And the EU nations will have to face up to bearing enormous costs to save the Europe we wished for.

"The exception to this global picture is in the US, where sector performance was a Pavlovian response to the much expected upcoming US rate rises (Utilities down and Basic Materials up). Global investors may be cyclically bearish, but US investors appear distracted by the historically cyclically positive message US rate rises might imply. We think this may prove a mistake."

The IMF’s Executive Board decision today means that the yuan will be included in the SDR basket from Oct. 1, 2016, effectively anointing the yuan as a major reserve currency and represents recognition that the yuan’s status is rising along with China’s place in global finance. The weight in the basket will be 10.92%, larger than JPY and GBP. However, as politically-motivated as this decision may have been, now comes the hard part for China.

Late last year, Japanese PM Shinzo Abe effectively forced the $1.1 trillion Government Pension Investment Fund to double its domestic equity allocation. With Kuroda providing perpetual Nikkei plunge protection, and with Abenomics set to bring about an economic renaissance, what could possibly go wrong?...

Update - Chinese stocks continue to plunge... Offshore Yuan surges on intervention.

Aside from 3 very small adjustments, The PBOC has fixed the Yuan weaker for the last 20 days, driving the mid-line to 6.3962 - the weakest since August 28th. After Chinese stocks collapsed on Friday, they are holding the losses for now as the biggest question remains just what the weighting will be for Yuan inclusion in The IMF's SDR basket (which looks set to be announced tomorrow - US time). Metals are tumbling (with Iron ore down 3.7%) and broad AsiaPac stocks are down around 1% as brokerages in China are plunging (Haitong -9.2%),

In a statement, the People’s Bank of China thanked the IMF for the recommendation and said it was “an acknowledgment of the progress in China’s recent economic development, reform and opening up”.