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Closing in on One Twenty
Three major FX pairs are closing in on rates where the big figures start with 120. The ones that have my interest are:
USDJPY = 119.40
EURCHF =1.2030
EURUSD = 1.2335
USDJPY looks like it wants to cross 120 in a matter of hours. The question is what happens when it does. My guess is that the folks at the Bank of Japan don't want the dollar/yen to rise much above the 120 level for the time being. The Abe snap election is just ten trading days away. An element of the election is the central bank's policy of weakening the currency. Japanese voters understand FX rates; they know they are paying more for imports and paying a ton more when they travel abroad. If the BoJ wants buy some votes by micro managing the FX rate with a temporary "lid" on USDJPY it certainly could. We shall see soon enough.
But assume that Abe gets his vote of confidence on 12/14. What does that mean? Adios 120. Another 20 big figures to 140 is a reasonable estimate. Another big move up in USDJPY will be the fuel for a currency war. Korea and China will not just sit back and let it happen.
EURCHF is a wild card (it might be a Black Swan). The head of the Swiss National Bank, Thomas Jordon, was drinking Kirschwasser after his big win on the gold vote last weekend. The vote was 4-1 in his favor! But where is the EURCHF today? 13 measly ticks above the close before the key vote. This lousy bounce from that vote? And Jordon felt it was necessary to issue an unusual Sunday SNB Press Statement that reaffirmed the SNB's commitment to "Do what it takes" including negative interests rates and unlimited intervention to support the 1.20 peg
I, for one, believe Mr. Jordon. I think he's willing to write an enormous check to back up his promise. I think he has enough ammo to hold the Alamo for a while longer. But I never believed that "Unlimited" was a realistic description of the powers of the Swiss Central Bank.
If Mr. Jordan's phone starts ringing over the next few months, and he's forced to put in bids for $250B Euros, he might have to blink. A 50% increase in reserves in a short period of time would force the unpleasant question, "What does unlimited really mean?"
I put a break of EURCHF 1.20 as a low probability. But, on the other hand, a 1/4 Trillion Euros is not all that much money these days - so this has fireworks potential. What is at stake is not just the Swiss peg promise. If the SNB adjusts the peg to a dirty float, then the market would, in a matter of seconds, redirect its sights on Mr. Draghi's promise of "Anything". This scenario may be unlikely, but it's a bad road to go. What could trigger a move on the SNB? A weak Euro would be the ticket to this show. How likely is that? Very!
At 1.2330 the EURUSD seems miles away from a break through 1.200. I think it could happen by Christmas. The best reason I can give for this is that all of the 'Deciders' (especially Draghi) want it to happen. We'll see if the markets give Draghi what he really wants for a Yule celebration. The problem comes shortly thereafter when the talk runs, "We blasted through 1.20, the next stop is 1.10, better get in now or miss it!"
These potential breaks of the One Twenty levels are milestones that will trigger more volatility. They are somewhat correlated as a major driver of this is the weak Yen. A cheap Yen puts pressure on the Euro, and that will influence CHF demand.
There is a factor in this that has me wondering. What is the status of the FX Interbank market? Is it solid?
There are thousands of FX players, but the top 50 financial institutions make up most of the volume. The big guys are market makers, the rest of the actors are price takers. Where do the top 20 players in the FX market stand today?
Many of the top spot traders have been fired or forced to resign. Others have seen the light and moved on to greener pastures. Trading desks have been thinned, position limits cut. Prop trading has been cut back. Robots do most of the pricing. Auditors look at every trade. Compliance types are peering over shoulders. All communications are monitored. I'm concerned that the 'Second String' is manning the desks.
Put that together and ask, "Is this weakened system able to absorb a spike in one-directional volume? Will it step up and keep order? Or will it back off and allow volatility to roar? "
We'll find out when the One Twenties get crossed.
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Has anyone noticed that the Canadian $ has broken decadal support on a monthly chart at the end of November?
Chart 425 is edifying
http://stockcharts.com/def/servlet/Favorites.CServlet?obj=1163423,12&cmd...[s205868964]&disp=E
Japan is the first domino. When it goes, within a few months everything goes with it.
Hey Bruce, great to see you back posting. Good article. Tick tock tick tock
Where you been Bruce? Banging some fine ladies in Thailand?
i am thinking the forex explosion led by the strong dollar is actually aimed at the yuan and the chinese people. as the dollar strengthens the yuan strengthens on the peg. as the yuan strengthens imports to china become cheaper and exports more expensive. the cause and effect are obvious but the goal is not. is this meant to crush the chjinese economy by taking away their labor arbitrage through forex or is it meant to encourage overseas investment and domestic consumption by the chinese?
Look at what nations have highest debt-to-GDP levels, and rank them from highest to lowest, and then watch as the devaluations of their currencies takes place along the same lines.
JPY will easily get to 140 to the USD within 3 months (maybe 2), and we'll see USD/EUR parity by 2016 or sooner.
Debt repayment & continuing deficits can only be sustained by currency debasement.
that was my original theory. the dollar strength gives tremendous room for more dollar debasement. i then thought that the only economy that could really save the world economy is still china. the only way china can help now is by consuming. the best way to make the chinese consume overseas products is to make the yuan strong.
it is a replay, of sorts, of the post ww2 strong dollar policy that lifted europe and japan out of the devastation of ww2.
I believe it is so Chinese wages don't rise at too fast a rate. Poor people don't generally revolt.
Good to see you posting again Bruce, nice article.
Intriguing title for numerology and technical analysis afficionados... and if "the big guys are market makers, the rest of the actors are price takers", in which category will "Marc to Market" of "Brown Brothers Merchant Banc" be placed?
JV FX traders and a 71 year old woman at the Fed.
Can't Wait
so Bruce you reaffirmed my belief that the Japanese people are the superior creatures on this dung pile, if they understand currency trading, US voters don't understand the Fed and probably can't tell you who the FOMC chief is, or what she does. are these currency pairs strictly the personal sandbox of the CBs or are there real economic forces behind this, are they just painting the tape, and arm wrestling with each other? frankly i dont get it but i do suspect the problem might be volatility, and extreme vol would prevent the BIS from doing their work. now low oil prices are turnings Putins ruble to rubble, whats the downside of that, is that Obamas plan? is this the new economic warfare?
She?
Janet Yellen, ya mook! You just proved his/her point about Americans.
Bruce - thanks for this. What I don't get is who is long JPY now? Your reasoning on 120 seems sound to me, I've been expecting a war at 120 - but I can't imagine who's on the left on the other side. This is, it seems to me, a loss-of-confidence trade - approaching a death spiral for the yen. One can say it's moved to far too fast - but how can one say it's going to get stronger? Short of outright debt forgiveness by the BoJ I don't see a return path.
they tried this same scheme, kinda, in the nineties. the yen went to 145 from around 110, if i recall, before the japanese chickened out and stopped the fall.
if they keep it up this time the south koreans will bomb them, forget about n korea.
Other side of JPYUSD @ 120? The Fed, for now. Need to keep Abe in place.
Draghi is not going to do anything but jawbone later. All this $usd strength is on the back of Draghi planning to open the fawcet. The ECB won't do anything until the end of Q-1 '15 if even then. There's only 640 billion in mortgage securities and other collateral to use. They would maybe purchase 15-20% in total... That's chump change.
Either way I like shorting the $usd after the ECB early Thursday.
After, isn't that being a bit chicken ?
Just do it before.
Go for it tough guy. With comments like that you seem to have everything under control.
You obviously have very little understanding of the options market. There's massive barrier interest @120.00 in the usd/jpy.
It's entirely likely that London which opens well before the ECB meeting will try to take that level out. (120.00) which could imply some further $usd strengthening over the next 12 hours.
That little risk reward thing?
Bruce is a statist apologist for the bankers. Skip his articles.
unlimited may be the case, the power families that live there....... and my guess as to where the owners ship "their" gold. Though the swiss govt may not be allowed to play with the piles. Appearances and all that.
Bruce very good to see you writing again. And reggie too! It's almost like christmas!
Bruce, good calls. I will do it thru options. More bang for the buck with its risk protection.
Bruce! Good to see you're back.
Where's the graffiti we've all come to know and love?
I spent a half hour looking at graffiti pics trying to find something with 120 in it. Didn't find anything, so I went with the clock.
It's been ages since I posted on a Brucie article! Wow somebody out there sure likes the number 1.2 (or 120)
The thing about the business of running a central bank is that it is just that: A business that answers to other businesses, and what do they want? A currency that is weak enough for exports to be competitive, yet strong enough against the currencies of raw material suppliers to be beneficial to all the businesses that have the ear of the central banker. You can see that in almost all the places where raw materials are dug up, their currencies are in a shit state and if it isn't, you can sure as bet that they will get a visit from the stormtroopers to make sure their government doesn't function, they are constantly fighting local wars, have "terrorism" problems and any loans they get from the international banks to improve their lot are short term, high interest to keep them at subsistence level. It's called the curse of natural resources.
What happens when the top tier countries (US, UK, EU and JP) start debasing their currencies to pay for all the wars and entitlements? Everyone else has to follow or risk their nation's businesses get priced out of competition, then follows the dance of the macabre to balance each other out to keep the status quo. The people who suffer are those who trust the money they hold as a store of value while each of the top tier countries buy each other's untenable debts to shuffle the most expedient relative values. As Bruce elucidated, there is a limit to this shuffle and the Swiss, for all their wealth, cannot even dream of matching their madness.
cogent, and yet... what are the Swiss options? the key problem of the SNB is the small size of it's currency zone versus the humungus amount of cash people like Bruce and the megabanks are willing to earmark for speculation
and it's the "bad" sort of speculation, not at all the kind of "buying when it's naturally low, like wheat in the reaping season", it's the "let's have a bet on how long this policy is going to hold"
"providing liquidity to markets?" seriously? that fig leave was long washed away by plentiful freshly minted credit
in short, most currency speculators could not care less if the CHF zips to ten or hundred times it's current value. the sky is the limit, and "the market is always right"
for the Swiss, it's still the currency with which they compete, exporting heavily in the eurozone, remember? and the currency to which they "floored" the CHF is currently not noted for strong price inflationary tendencies anyway
what is the real downside for the SNB if it continues to sell CHF against EUR? it accumulates FX reserves. what is the real shitty position a CB can find itself? see Russia, having too little or the wrong kind of FX reserves, or both
Quite. As long as their exports are focused in the EU, there's really not a lot the Swiss can do but more of the same. Short term expediency always wins in politics. Though at some point, just like those NPLs in Chinese banks, they may come and bite them on the arse - that's the worse case scenario (Which is probably unthinkable for a pro-euro currency chap). Not quite sure whether the Swiss experience is applicable to Russia since the Swiss are not under sanctions nor at the threat of war and hence it seems less about their FX reserves than about taking sides in a future hot war.
YHC-FTSE, re "Which is probably unthinkable for a pro-euro currency chap"
I must say... I resent that, from you. In fact, I find it a slightly bit insulting. What on earth do you think I might find "unthinkable"?
And you seem to misunderstand me, it's not the Swiss experience that is applicable to Russia, it's the Russian experience that might be doubly applicable to Switzerland
imo it's a fact is that the very moment the "international markets" start to play with a national currency... it's not anymore a matter of real economy logic, it becomes a matter of casino logic. but perhaps you are a "market fundamentalist", and this is unthinkable for... you
so I repeat my little thesis: national economies with a currency zone have a certain size. of trade, of volume of salaries, etc. "Capital", or just "money" set aside worldwide for speculation on "things that might change" like monetary policies of Russia, Switzerland, etc. has another size
and the mismatch is immense. just look at the SNB's balance sheet, for example. just look at the current speculative positions on the EUR
again, in short, IF Bruce and the megabanks and all those who have spare money for betting start to play in earnest with the CHF ball... bears vs bulls strategies become market reality, and the real Swiss economy becomes... academic
this is the SNB's quandary. it risks to have it's currency becoming a global "value storage vehicle" in the best case (a similar thing to what happens to global reserve currencies), and a global "betting instrument" in the worst case
which could lead the real Swiss economy - and this is something you might find unthinkable - switching to either the USD or the EUR. As I'm repeating often, many Swiss companies already offer pricelists not denominated in CHF
why? because "bad money drives good money away", another way to say that the real economy searches for a stable Numéraire, for it's economic price calculation
keep the jewels coming !
My sincere apologies Ghordius, no insult meant I can assure you. I was under the impression that all of us seasoned chaps on zh are used to a bit of rib digging and irony. :). So please rest assured that I'm horrified you resented it and deeply sorry for any offence caused if you were serious.
It's true that the mismatch of national funds set aside for speculation in FX is huge, as is the cash flow of the participants and as you say the size of the movements will indeed dictate the the relative FX that most likely will affect the real Swiss economy. That is true of any speculative vehicles - I remember a UCL study done on the effects of speculation on staple foods which concluded that the prices which eventually led to many 3rd world nations being priced out of staples which caused millions to starve, was solely based on large movements in the speculative markets and nothing at all to do with actual supply and demand.
"Global betting instrument" is what is happening in many instances, is it not? We had the period of the CHF becoming a "value storage vehicle" for awhile which led to a strong surge in CHF that in turn led to the SNB pegging to the Euro. You do make a very good point in explaining that many Swiss companies offer price lists in other currencies (As almost all others do around the world, if you think about it) because the real economy is always searching for a common relative value as a benchmark to price goods and services. Essentially, I think the consequences of the situation with the reserve currency and its top tier supporters are driving the problems we see around the world. Problems of debt-as-asset, problems of buying debt to shuffle one's nation's relative currency value, problems of speculation in debt, problems with default, and problems with insuring against default. That is what happens when the reserve currency is based on debts, untenable debts that merely takes a nanosecond to transform itself from an asset to a liability.
You are also correct to point out that I might find it unthinkable to see the Swiss switching to the Euro or USD. If you put it like that, I guess I am blinkered in my obsession with sound money and accounting principles. Business is business, as they say and perhaps I shouldn't allow my own ethos cloud my judgement of the efforts of others to survive in this environment. :)
YHC-FTSE, it's terribly polite and corteous from you. Thank you, and please pardon my hystrionics
I can only reccomend a look in this wiki article http://en.wikipedia.org/wiki/Currency_substitution , it used to be called dollarization
further, this one might be equally enlightening: http://en.wikipedia.org/wiki/Montenegro_and_the_euro
besides laughing about how some idiots in Brussels are behaving about that, it's all a corollary to Gresham's law
which I would state as: "economically useful money drives economically less useful money away"
We only lean to one side or another.
Never ally.
ALL RIGHT!!! Bruce and Reggie both back on ZH's top line.
I might read Reggie if he could cut his word count by 2/3s. In the meantime, TLDR.
it's amazing such a successful man is unable to employ someone to check his writings' grammar.
Bruce, nice to see you.
Swedish government on brink of collapse:
http://www.aljazeera.com/news/europe/2014/12/sweden-government-budget-crisis-201412304043170182.html
Tick-tock, tick-tock.
The swedes are a nation in total decline.
The kosher MC brigade made sure the girlies all had black cock fantasies and they have become weaklings.
Here is Barbara doing a tour of sweden.
https://www.youtube.com/watch?v=k2Vq_e2Z1ug
US government contract for ambulance transport of Ebola and highly infectious disease patients?
Iraq denies Lebanon captured wife of ISIS Leader Baghdadi despite daughter’s positive DNA test
France parliament votes in support of recognizing Palestine, Israel says peace process will suffer
Who gives a fuck.
120 in USDJPY is nothing more than a "pit stop" to much higher levels; as for EURCHF, eventually hubris kills all of these central bankers no matter what they do. I won't buck the SNB, but if they blink at the moment of truth, it will get messy quickly.
www.traderzoo.mobi
USDJPY is going to 145 then 250 then 400 in less than 2 years. The mother fucker isn't worth the paper its written on. Japan goes 1st, then Europe. I have two investments. 1) i have been short the yen, YCS, for over a year and long gold physical. Everyone else is just dumb and dead wrong. I am all in.
One Twenty? Here's another one: gold at $1200.
and that seems to be the price at which Chinese buy with both hands and a cart, too
It used to be that we print and they ship us stuff (mostly shit, but some of value)... now, we print, they print more, and buy our RE and eat up all the gold on the international market. I'm not sure, but in the scheme of playing the game, it appears we're busy licking the glass on the short bus.
So perhaps the Swiss gold vote simply took place too soon.
I wonder how long it will be before the DXY hits 120, and how far and fast it will go after that.
Great question. I surmise it all depends on the strength of what holds the entire $DX/ $UST complex together in the first place, doesn't it...? That, and perhaps U.S. foreign policy towards certain nations...?
Japan's public debt, which stands at around 230% of its GDP and is the highest in the industrialized world. We are seeing fostered upon the world one of the biggest Ponzi Schemes modern economic history.
When you introduce demographics into the picture we see that Japan is stuck with an aging and shrinking population that is evermore expensive for the government to provide for. Adding to its woes the Fukushima nuclear disaster has shuttered its nuclear power plants and forced the country to import more expensive energy alternatives.
Neither monetary nor fiscal policy will adequately solve Japan's problems. Continuing to run fiscal deficits only means that government debt is pushed onward and upwards leading to a variety of possible scenarios as to the what the end game will be. Simply put, the fundamentals for Japan are lousy. More on the downward path that Japan is on in the article below.
http://brucewilds.blogspot.com/2014/05/japan-sliding-towards-abyss.html