A Look At How $58 Billion In USD Purchases Buys You 4 Days Of FX Intervention
It was just 4 days ago that the BOJ purchased Y4.5 trillion (or $58 billion) worth of dollars in the open market to lower the Yen against the dollar. Well, that intervention last not even a full 4 days. As the chart below shows it is time for Shirakawa and Noda to start watching... watching... watching... the yen as it once again approaches all time highs against the dollar. But at least the equity market is confused enough to believe that 2 years of projected deflation is good for risk. Ben wins.... if only for a few hours. The irony is that everyone expected that a fixed inflation (or in this deflation) calendar language is the weakest of the Fed's options. Now that this is precisely what has been utilized, a soft form of Operation Twist 2 which locks in the rates on the 2 Years as explained previously, the market is cheering it deliriously. Once the market has slept on it, it will likely realize why it was so skeptical as recently as 2 hours ago on the viability of this approach.
And after all that, for all those still confused by what is going in the market, here is Peter Tchir with another attempt at an explanation:
I was definitely thinking it was bad for risk assets at first. It stopped short of any QE3 and definitely didn't hint at the ability to do more. I really didn't think much about the 2013 date for virtually zero Fed Funds. Probably because I'm bearish on the economy and haven't been betting on a raise in rates any time soon. In the end, that single line item may be doing more than QE3 could have. QE3 would have gotten a pop, but would of had a whiff of desperation. Keeping rates at zero certainly isn't a ringing endorsement of the economy, but in seems more like an extension of an existing policy, rather than a knee-jerk reaction to the market. He keeps QE3 in his back pocket and as of now is managing to get stocks and treasuries to go up! They were also able to say that the economy is showing signs of weakness. Although I believe it is heading weaker than they anticipate, they did give other investors a reason to remember why they were bullish as recently as a week ago.
It is pretty clear now that the S&P cut had no impact on the desire to buy treasuries. Yesterday's move in stocks may have used S&P as an excuse, but it also had BAC to push it down (which has stabilized today), and continued fears of European markets (where the ECB has been able to keep rates stable two days in a row).
I am not sure we are out of the woods on this sell-off, but for once I have to give credit to Ben and the Fed. They have come out with a statement and policy that seem to be working at least for an hour, which these days feels long term. Personally I find it a lot less objectionable that they plan on holding Fed Fund rates at zero for a couple of years than QE3 (knowing they will change that if they need to). I have to think about it more, and that ultimately it is the same thing, but my initial reaction is that I find it less offensive. And probably far easier to exit from. I am always quick to complain about Ben and the Fed, but for now I'm willing to give him credit for coming up with this plan.
One thing I have been viewing as positive is the move in Italian and Spanish yields. I am being told that this was done with somewhere between 3 and 8 billion euro. That seems like an incredibly low number to get such a big impact on over 2 trillion of debt. To move yields so much with so little just shows how illiquid that market is. The bull argument would be that means that the ECB has plenty of money to keep rates low. The bear argument would be that such little money is likely to have a long term impact. The big question I'm trying to get my hands around, is what were the volumes that went through on the move wider? I've known the markets were illiquid, but this is even less liquid than I would have ever guessed. Have I been over reacting to the move wider in Spain and Italy? Trying to dig out more volume data.
And once again, gold has been strong all day.
Given how oversold assets like high yield and stocks are, this might just be enough to keep the markets going. Though I'm certainly going to see if the current PPT-like stick-save can last until 4 pm.
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