Yen Intervention Lasts For Hours

It's almost a repeat move so far. The intervention failed earlier if the low is already in.

ECB Emergency Meeting, FOMC and Japan's Crisis

ECB calls surprise meeting as borrowing costs rise

European Central Bank policymakers called an emergency meeting on Wednesday, as more indebted eurozone states have come under pressure from rising borrowing costs. A week after a regular gathering, the governing council will hold an "ad-hoc meeting"...

...The switch in the central bank's policy has raised the spectre of "fragmentation" in the eurozone, where the borrowing costs for some, more indebted members rise faster than for others.

My guess: Powell told the ECB a 75 basis point hike is coming. Spreads have been widening in Europe and the market action makes an emergency meeting warranted, but why not Monday or this Friday? The day of the FOMC announcement makes me think they want to project stability ahead of a surprise. Even if I am wrong, I view the emergency meeting as a sign a culmination move is underway or possibly even over. 

There hasn't been a highlight-reel blow-up like Bear Stearns yet, but the market fell about 20 percent into January 2008 and then retested that level in March 2008. It then rallied on the Bear Stearns bailout.

My view of the current situation: the economy is in worse shape than in 2000 and 2008. The Fed really screwed up leading into 2000 and set the course for everything that followed. The 2008 crisis was one where everything happened very rapidly. There was a slow buildup with housing topping around 2006-2006, the Bear Stearns hedge funds failing in August 2007 and an emergency rate cut by the Fed, auction securities failed in February 2008, Bear Stearns in March...and then everything collapsed at once. 

I do not expect everything will collapse at once this time, at least not until there is actual deflation in the economy. Instead, I expect something a longer period of decline similar to the 1970s. "Authorities," such as the ECB today, will step in and try arresting the decline. There is a case to be made for slowing the process of rate hikes, drawing out the pain to lessen the risk of a catastrophic collapse. 

There is one exception for a crisis. A sovereign debt blow-up and currency crisis in a major nation. Candidate number one is Japan: Japanese Bond Futures Suffer Biggest Rout Since 2013, Trigger Circuit-Breakers After 'Soros'-Style Bets Build

I will kick myself if this crisis kicks off now because I closed out my JPY shorts, but I do not think this is coming right now. Like the housing crisis though, a JGB-yen crisis can be seen from miles away, in fact it was seen at least a decade away. This phase from John Mauldin was seared into my mind 12 years ago: Japan Is a Bug Searching for a Windshield

Maybe we'll do it like Japan? Japan is a disease. They're like a bug searching for a windshield. It's a dying country. Nominal GDP is where it was 17 years ago. Plus, the population is very old. When they stop funding their own debt [as a result of retirees ceasing to save], it's going to get ugly. You're going to see the yen valued against the dollar go to 100, and then 120, and then 250, 300. They won't care how low it goes. They can sell more Hondas and Toyotas to us. They're just going to print money. 40% of their budget right now is borrowed. Think about that. They're in deep dire trouble with a government that has no clue. I think Japan will implode within the next two to three years. It will not be good for the world.

This event didn't happen in two or three years, but most people thought QE1, QE2 and QE3 would lead to the inflation seen now, in 2022. It took catastrophically bad policy in response to a novel respiratory virus, along with years of stupid energy policy, to get us to this point. Long Nikkei/short yen will be one of the trades of the decade if events continue playing out on the current trajectory. 

Short-term: I expect a bounce in stocks, a pullback in the dollar. After that, the deluge.

Japan is Done Tapering

The Bank of Japan has quietly ended asset purhases and even may have started implementing some QT.

Wolf Street: One of the Biggest Money Printers, the BoJ, Stopped Printing Money

The Bank of Japan is one of the top three QE monsters in terms of the absolute amount of assets it purchased. The Fed and the ECB round out the trio. The BoJ started QE over 20 years ago, and went hog wild under Abenomics, which became the economic religion of Japan in 2013. But the era of Prime Minister Shinzo Abe ended in September 2020, and Abenomics is now finished. What’s left of it is that the BoJ now holds about half of the huge pile of the central government’s debt.

But QE has ended. The BoJ’s overall assets stopped growing, and its holdings of government bonds have started to decline.

As of the BoJ’s balance sheet dated September 30, released on Thursday, total assets declined to a still monstrous ¥724 trillion ($6.4 trillion), below where it had been in May 2021:

Interesting in the context of USDJPY, which this evening moved above its March 2020 pandemic high.

Related: Japanese Yen Hits Pandemic Low vs Dollar, Has a Bear Market Begun?

Prices Are The Facts Now

"Prices have changed more than the facts, thereby creating a scenario in which the selloff will (eventually) need confirmation from the real economy that elevated optimism is warranted."

Not understanding the prices are the facts in the market now, that markets are divorced from fundametals and trading on their own formulations, is what will eventually wipe out central banks and all investors who don't understand it. If you want real facts, ignore market prices. Inside the market, prices are the facts.

Fuck Everything, We're Going to Negative Five Percent

by Haruhiko Kuroda, Governor of the Bank of Japan.

Would someone tell me how this happened? We were the fucking vanguard of central banks going to negative interest rates. We invented QE. Then some other central bank came out with QE and started adding numbers. Were we scared? Hell, no. Because we hit back with a little thing called negative interest rates. That's below zero for people in the USA. But you know what happened next? Shut up, I'm telling you what happened—the bastards went to negative too. Now we're standing around with our cocks in our hands, with negative rates doing nothing. Suddenly we're the chumps. Well, fuck it. We're going to negative five percent.

Sure, we could go to negative one percent next. Then negative two percent. That seems like the logical thing to do. After all, if one worked out pretty well, two is the next number after one. So let's play it safe. Let's make go a little more negative and buy more ETFs. Why innovate when we can follow? Oh, I know why: Because we're the motherfucking BOJ, that's why!

You think it's crazy? It is crazy. But I don't give a shit. From now on, we're the ones who have the edge in the negative interest rate game. Are we the princes of the yen? Fuck, no. The BOJ is the King.

What part of this don't you understand? If negative two percent is good, and three percent is better, obviously five percent would make us the best fucking central bank policy that ever existed. Comprende? We didn't claw our way to the top of the central bank game by clinging to the postiive interest rate standard. We got here by taking chances. Well, negative five percent is the biggest chance of all.

Here's the report from the economists. Someone put it in the bathroom: I want to wipe my ass with it. They don't tell me how to make policy—I tell them. And I'm telling them we're going to negative five percent. I don't care how.

You're taking the "stability" part of "financial stability" too literally, grandma. Cut the strings and soar. Let's hit it. Let's roll. This is our chance to make central bank history. Let's dream big. All you have to do is say that negative five percent can happen, and it will happen. If you aren't on board, then fuck you. And if you're on the board, then fuck you and your father. Hey, if I'm the only one who'll take risks, I'm sure as hell happy to hog all the glory when the negative five percent interest rate becomes the policy of the Federal Reserve in the US of "this is how we central bank now" A.

People said we couldn't go negative. It'll destroy the yen, kill the bond market, cause hyperinflation they said. Well, we did it. Now some egghead in a think tank is screaming "Five's crazy?" Well, perhaps he'd be more comfortable at the European Central Bank, common currency my ass!

Maybe I'm wrong. Maybe we should just ride in the Fed's wake and do more liquidity injections. Ha! Not on your fucking life! The day I shadow a penny-ante outfit like the Federal Reserve is the day I leave the central bank game for good, and that won't happen until the day I die!

The market? Listen, we make the market. All we have to do is put her out there with a little jingle. It's as easy as, "Hey, getting anything less than negative five percent is like eating the 2 week old hotdogs at 7-11." Try "Your interest rates are going to be so friggin' negative, someone's gonna walk up and hand you a bag of cash."

I know what you're thinking now: What'll people say? Mew mew mew. Oh, no, what will people say?! Grow the fuck up. When you're on top, people talk. That's the price you pay for being on top. Which the BOJ is, always has been, and forever shall be, Amen, negative five percent, sweet Emperor in heaven.

Japan Cracks? Questions Over Monetary Policy Grow

This story came out a few days ago, I'm surprised it didn't get more press, but the Fed meeting likely overshadowed. Next week will be the G20. This story sounds like it might be bigger than both.

Reuters: How Japan turned against its 'bazooka'-wielding central bank chief

Three years on, there is a broad consensus that Japan’s experiment in shock-and-awe monetary policy has failed. An intense debate is under way within the BOJ over why Kuroda’s assumptions about how he could fundamentally change the trajectory of the economy proved wrong and what the bank’s next steps should be. The picture that emerges is of a central bank under pressure and at a moment of reckoning.

...Japan’s banks have lobbied energetically against Kuroda’s policies. Under Kuroda, the BOJ has flooded Japan’s economy with so much cash that the average interest rate on new loans has cratered, cutting the banks’ margins. Big banks have shuttered branches, while smaller banks have struggled to merge.

Under pressure, some banks are scrambling to diversify. One remarkable example: In western Japan, Yamaguchi Bank says it is renting out space at one of its branches for a wine bar that is slated to open next month. The bet is that diners might also open an account or take out a loan, the bank says.

In April, the BOJ issued a warning for the first time in almost three decades that financial institutions were at risk of over-extending loans to real estate borrowers as they chased returns.

Correction or Bear Market? Find Out Soon

Earlier this year, I posted 2018: The Pivot Year. Coming into the year, many markets were poised for bullish breakouts if they weren't already breaking out. Massive inverse head-and-shoulders patterns on coal, steel and various emerging markets pointed to a potential inflationary breakout. Long-term bond charts signaled confirmation of higher inflation. On the other side of the argument, macro forces were arguing for a downturn. I favored the macro argument for deflation/disinflation and a downturn, but I had to respect the signal the charts were throwing off. Wrong or right, the year 2018 was going to shut the door on one of these scenarios.

One way or another, I expect action on trade in 2018.

Finally, the overall trend in social mood remains negative. I believe this is a higher order decline as in the 1930s, and thus dollar positive (deflation) rather than a correction and inflationary (1970s).

As I said above, I could be wrong. And the best case for my being wrong is still the commodities markets. Several funds such as steel, copper and coal (and related emerging market countries reliant on natural resource exports) are on the verge of breakouts. I expect China to slow, but FXI recently broke out above its resistance again and opened up 3 percent on Tuesday.

Macro proved correct. Slowing credit growth, slower economic growth, a stronger U.S. dollar and tumbling asset prices turned breakouts into failed breakouts.

Many are convinced this is only a correction and not a bear market. The reason is 2016, 2011, 2010 and 2009. Global central banks stopped a deflationary panic 4 times before and they'll do it again goes the bullish argument. Bears were burned each time, including in 2016 when it looked like a bigger decline was underway. In December 2015, I posted 1937 Redux: Deflationary Wave Has Returned. I was wrong then because I was focused more on the Fed and not global central bankers.

For the same reason I was mistaken about a large move in 2016, I believe this time is either a monster correction that will be aborted by central bank panic, or a bear market. Here's the global credit impulse from Saxo Bank.

Aggregate credit growth slumped in 2014 and into 2015 before turning up. Asset prices started wobbling in 2014. Oil plunged in November 2014. The yuan was allowed to devalue in August 2015. Global asset prices bottomed in January and February 2016.

Credit growth is a slow-moving leading indicator and bear market (correction) phases are short and brutal. It's always possible markets respond to other factors, but if credit growth is a key driver of global asset prices, it has yet to bottom, indicating global markets may not bottom until Q3 2019 at the earliest. That's assuming a central bank reverses policy. The Federal Reserve could signal a slower pace of rate hikes this week, but that doesn't do much for the market over the long-term. The ECB ended QE in December, as the Fed did at the end of 2013. Chinese credit growth is still slowing.

Back in August 2015, the month China allowed the yuan to depreciate, I posted: Shenzhen Home Prices Rise 20% in Three Months, Some Beijing Developers Hiked 10-20%, Each New Project Opens 5% Higher. I thought home prices were rising nominally ahead of a breakdown in the yuan, but it turned out it was a major burst of credit growth. In early 2016, China would layer on more stimulus to drive the market higher. A few months after global markets bottomed, I was posting articles such as Reform Can Wait: 4 Trillion Stimulus All Over Again as SOEs Pour into Land Market and Flour More Expensive Than Bread: Second Tier Land Prices Soar 180 pc and Ministry of Finance Owned Cinda Real Estate Becomes Land King. The seeds of a credit bubble were sown in mid-2015 and they were in full bloom by mid-2016. Starting in October 2017, China kicked off another major deleveraging effort. The last one started in 2013.

As that prior deleveraging wave was kicking off, I posted China Real Estate Rage Is Back; Ghost Cities Everywhere; Offshore Yuan Plunges; Talk of Falling Real Estate Prices Across China. In October of this year I posted: Real Estate Rage Spreading As Developers Grab Golden Week Opportunity, Will 2019 Be the Year of Defending Rights?

How do things look today in China?

iFeng: 专家：明年经济增速目标或下调 预计增速为6.2%至6.3%

Xu Hongcai, deputy chief economist of China International Economic Exchange Center, said that from the accumulated data, the economic operation is still stable. Judging from the figures in November, the current downward pressure on the economy is high. The economic growth slowed down in the fourth quarter, and this trend may continue into the first and second quarters of next year. The economic growth rate for the whole year is expected to be 6.2-6.3%.

That doesn't sound very pessimistic, but that's because it's translated through a propaganda filter.

More importantly, housing shows no sign of the reversal seen in 2015. Not only that, but prices have only plateaued. A decline in prices is ahead, not behind. China's NBS published November price data and it shows new home prices rose 1 percent nationally, with 63 cities reporting rising prices. Existing home prices fell in 17 cities.

iFeng: 楼市现拐点？连续两月超10城二手房价下跌

In November, the prices of second-hand houses in as many as 17 cities were down month-on-month, with Xiamen, Beijing and Wuxi falling by the top three, down 0.7%, 0.6% and 0.6% respectively.

In addition, the prices of second-hand houses in Hangzhou, Ningbo, Fuzhou, Zhengzhou, Tianjin, Guangzhou, Wenzhou, Jinhua, Shijiazhuang, Shenzhen, Quanzhou, Shanghai, Hefei and Haikou also fell to varying degrees.

Existing home prices rose 0.54 percent nationally, but those first- and second-tier cities are the leading indicator.

I've seen some arguing emerging markets will lead a bullish turn. The U.S. market has underperformed in the past couple of months, but that looks more like the U.S. catching-down to emerging markets.

If I can only have one chart and one asset, then it's all about the U.S. dollar. The broad trade-weighted U.S. dollar is less than 1 percent from its all-time high. The U.S. Dollar Index (DXY) is about 6 percent away. Long before DXY hits a new high for this bull market, the dollar will be at an all-time high versus global fiat currencies thanks to the rising share of EM currencies. Layer on my forecast for USDCNY to blast through 7 and its a recipe for financial market turmoil.

Given my poor timing ability, I would not be surprised to see a rally unfold into the New Year. Longer term, I expect Chinese economic data will worsen in early 2019, around the time of Spring Festival.

Here's one more chart that argues the decline is in the early stages: high-yield credit spreads. Investment grade spreads show a similar pattern. The only time a credit spread breakout failed to terminate at much higher levels was in 2005, when it was driven by an accounting rule change. Stories such as Leveraged Loans Are Looking ‘Scary’ to These Money Managers are reminiscent of the 2014-2016 correction's final stage, but spreads were far higher when funds such as Third Avenue Focused Credit shuttered.

If the "super bulls" are right and this is 2016 all over again, credit spreads and the U.S. Dollar Index (which hit a new 52-week on Friday) will turn down. Chinese credit and economic growth will pick up. Commodity prices will turn higher along with U.S. GDP growth, and interest rates will breakout to new multi-year highs. If the "central-bankers will save us" bulls are right, I'd wager the S&P 500 Index will have to fall another ~10 percent in the first half of 2019. A slow and orderly decline with low VIX and GDP growth above 2 percent won't spur the Fed. If the bears are right, the U.S. Dollar Index is heading above 100, possibly terminating at 120 or higher. The real pain for emerging markets and China hasn't begun yet.

A look at social mood points to either a short-term peak in negative mood or something much greater. The Yellow Vest protests in France continue and have spread as far as Canada.

Express UK : Macron's 'yellow vest protests' set to SPREAD WORLDWIDE - Egypt fear riots and CHAOS
CTV: Yellow vest protests spread to Canada, criticizing illegal immigration, taxes
BI: 70 yellow vest protesters detained after rallies spread to Belgium and the Netherlands

Brexit and Trump came at the tail-end of the prior downturn. Many of these protests (Egypt aside) have begun with major indexes only slightly off multi-year, decade-plus or all-time highs.

Finally, here's the S&P 500 Index and the Federal Reserve balance sheet, percentage change since the end of 2008 on the same axis. The S&P 500 tracked the rise in the Fed's balance sheet. It was in a trading range from the end of QE in December 2013 until the November 2016 U.S. Presidential Election. This time QT is underway. Since it began in October 2017, the S&P 500 Index has again seen virtually no gain (25 points, ~1% since October 31, 2017). In the absence of QE, stimulative fiscal policy and foreign central bank QE, stocks will at best tread water.

Another October Surprise for Dollar Shorts

FT Alphaville: The BoJ’s questionable success fulfilling the demand for dollars

One interesting point: no one seems to think the main cause of the dollar-funding pressure is a decline in bank creditworthiness. We’re ready to believe that after the latest European stress tests, where most banks came out “in pretty good shape”, according to CreditSights (subscribers only). It’s not a Brexit consequence, either, according to Goldman Sachs.

Instead, it’s apparently being driven by US money-market fund rules that go into effect in October.

Those regulations require prime and municipal money-market funds — meant for institutions investing in short-term commercial and municipal debt — to allow net asset values to float and impose liquidity fees and redemption gates in times of stress. That makes prime and municipal funds less attractive for institutional investors, and gives US fund complexes like Fidelity Investments a good reason to switch their offerings to government-debt and Treasury funds from commercial paper funds.

Do people believe the stress tests? TEN FUN FACTS ABOUT THE EUROPEAN BANK STRESS TESTS

5) Since the imposition of negative rates in Europe (illustrated by the arrow), here is what the SX7E index has done

6) So naturally, the stress tests did not measure the impact of more negative rates, only a move higher in rates

7) This is the equivalent of measuring the impact of a dog whistle on a deaf person

8) More European banks failed the Fed's stress test (DB and Santander) than the EBA version (albeit, as noted, there were not official pass/fail grades this time around.)

9) If you can believe it, DB scored half a percent better on the stress test than Barclays

Bernanke's Advice for Japan: Perpetual Bonds

Bloomberg: Bernanke Floated Japan Perpetual Debt Idea to Abe Aide Honda

He noted that helicopter money -- in which the government issues non-marketable perpetual bonds with no maturity date and the Bank of Japan directly buys them -- could work as the strongest tool to overcome deflation, according to Honda. Bernanke noted it was an option, he said.

Japan could issue infinity perpetual bonds at negative interest.

If Japan does increase it's intervention enough to weaken the yen, how will yuan respond?

The next key level for USDJPY is 106.50, if it can't breach that level, the central bankers are in serious trouble.

US UK Japan Launch Secret Currency War

Japan and the United Kingdom are easing, while the United States is now back in hawkish mode following a bounce in the stock market:

Since this week, there are three central bank around the corner. First Tuesday BOJ secret meeting Bernanke, the second loose an arrow already in the string. Followed by the Bank of England drawn the short straw, the fastest may start to cut interest rates on Thursday for the first time in seven years. The "opposition" camp Fed also re-exposed 'hawks' faces, the latest news, there are six local support Fed raised the discount rate.

Despite the recent market rebound, but some indicators have revealed dangerous atmosphere. On the one hand, US interest rates expected to rise, pushing up the dollar index; on the other hand, Japan will reopen the door loose, greatly boost the global stock markets. So there have been rare in the history of the US dollar and US stocks Qi Zhang a "spectacle."

The divergence in policy is reminiscent of early 2015:

This is reminiscent of the first half of 2015, global central banks that clearly divided the "currency war." Federal Reserve Chairman Yellen was on the job just over a year, is almost complete reduction of QE, the market has begun to point rate hike speculation. On the other hand, across the sea of ​​Japan and the European Central Bank, but had to use more lenient margin for the weak economy continue to inject stimulants. At that time there have been stocks and the dollar Qi Zhang.

The trend in the second half of 2015, especially the US rate hike, "big move" when the warm-up to the hit emerging markets, international investors believe that every fresh.

iFeng: 美日英齐出招！全球央行“暗战”今夏开打

Ice Cream Bar Explains Inflation Expectations in Japan

Some prices in Japan haven't changed in 30 years. In the case of an ice cream bar, it was 25 years. The result is people do not expect prices to rise and when they do, it results in an ad like this one, where the entire company apologizes for the increase.

NYTimes: In Japan’s Slow Economy, Rare Price Rise Prompts Surplus of Remorse

Akagi last increased prices a quarter of a century ago, and it debated the recent rise for seven or eight years, Mr. Hagiwara said. The rising cost of raw materials finally forced Akagi’s hand, he said. Tighter logging restrictions in China, for instance, meant it had to use more expensive Russian lumber for ice cream sticks.

In stronger economic circumstances, Akagi’s price increase would not stand out. Companies in other places routinely pass on higher costs to consumers. But in Japan, businesses that face rising costs feel they have less ability to do so because wages are flat. Instead, they take a hit to their profits or cut back rather than alienate consumers.

“We don’t have any more income, but taxes are rising,” said Kazuko Ida, 65, who lives in Tokyo. As a result, she said, she is especially reluctant to spend more. “It’s one thing if luxury items are expensive, but if cheap things aren’t cheap anymore, it’s a real problem.”

But if you're the Bank of Japan, that is the solution.

Fed Clueless, Just Following Japan

Alhambra: Unfortunately, It Was Only A Brief Moment of Clarity

Because of that intentional, self-limiting blindness the FOMC when confronted in 2007 with nothing they were familiar with did exactly as Greenspan admonished in advance. The FOMC especially under the staunchly unmovable Bernanke was left just making it up as they went (and failing time and time and time again). By the end of 2008, sifting through all the wreckage, what did they do? They followed Japan even though in June 2003 they had once declared everything that was supposedly wrong with Japanese QE.

...Governor Kohn was apparently unable to imagine how non-Japanese central bankers might also possess (if not only possess) great ability to undermine themselves and their assumed power; especially in situations where they should not be so sure what power they might actually possess in the first place, essentially the central point of this discussion in June 2003. Alan Greenspan’s warning at that meeting could easily be distilled as “make sure you can actually do what you say you can do before you actually have to do it.” Unfortunately, that would require honest assessment, which is something the Fed has demonstrated itself (over and over) never quite capable of producing. Instead, Kohn’s words might very well have been repeated by some other central banker in some other global hotspot criticizing Janet Yellen in 2014, 2015 and still in 2016. Apparently it was better to fail as the Bank of Japan failed then to do something with an actual chance of success – like let markets clear out imbalances while undertaking honest understanding of the actual run of banking and global money (and now its material deconstruction). It’s not like there hasn’t been ample time for this, inching closer every FOMC meeting toward a full lost decade despite that institution years before its start essentially warning itself not to do what it has done.

To date there have been no repercussions for any of this. They really don’t know what they are doing and these people will not stop no matter how far they sink us and how absurd they act in doing so. It reminds us once more why the recovery is now only political.

This brings to mind Japan's "mistaken" rate hike: Trichet, King Haunted by BOJ’s Premature Interest-Rate Errors

Japan’s woes, which began with the bursting of an asset bubble and extended beyond the “Lost Decade” of the 1990s, were a reference for central banks seeking to avoid its errors when battling the credit crisis. Ben S. Bernanke, now chairman of the U.S. Federal Reserve, said in 2003 Japan’s “performance is due almost entirely to a very poor monetary policy.”

Now some are looking to its track-record on withdrawing stimulus, with U.K. policy maker Adam Posen saying last month that colleagues should learn from Japan’s 2000 interest-rate increase, which “led to bad macroeconomic outcomes.”

Japanomics or Chinanomics?

Bloomberg: The Tokyo Whale Is Quietly Buying Up Huge Stakes in Japan Inc.

While the Bank of Japan’s name is nowhere to be found in regulatory filings on major stock investors, the monetary authority’s exchange-traded fund purchases have made it a top 10 shareholder in about 90 percent of the Nikkei 225 Stock Average, according to estimates compiled by Bloomberg from public data. It’s now a major owner of more Japanese blue-chips than both BlackRock Inc., the world’s largest money manager, and Vanguard Group, which oversees more than $3 trillion.

From earlier this month: China's PPT Top 10 Shareholder in Majority of Firms; Industrials and Smaller Companies Dominate

BofA: Fed Will Hike

ZH: Bank Of America Reveals "The Next Big Trade"

In recent years, FX investors had to focus primarily on getting three key market drivers right: global risk sentiment, commodity prices, and which central bank will ease more and deeper into unconventional policy territory. Interaction between these three made life difficult for FX investors. However, looking back, these three can explain the biggest moves in the FX markets in the post-crisis years: the JPY weakening when Abe and Kuroda pushed with Abenomics; the EUR weakening when the ECB introduced QE after a long delay; the weakening of commodity currencies when oil prices collapsed; the strong CHF during the Eurozone crisis and when the SNB removed the EUR floor; and the EM rally during Fed QE and the sell-off when the Fed started QE tapering, to mention some of the most notable examples.

However, something fundamental has changed in the FX markets this year. Risk sentiment and commodity prices remain key market drivers, with China and oil prices in particular. But the market reaction to central bank policies has changed substantially.

Five G10 central banks have surprised markets with their policy easing this year, namely BoJ, ECB, RBNZ, Riksbank and Norges Bank, but their currencies are now stronger. With the exception of New Zealand, equities are also down for the year in these countries, which raises questions about the effectiveness of their monetary policies. In relative terms, the RBNZ was the most effective in weakening its currency, while the Norges Bank the least effective. A weaker currency may not be the main goal of monetary policy easing, but a stronger currency--and weaker equities--after having eased more than markets had expected is definitely a puzzle.

We have recently argued that markets have stopped focusing on what central banks are doing and are now focusing on what central banks may or may not do ahead.

If the BoJ or ECB suddenly called off their intervention, initially there's the shock reaction and likely rally in yen or euros, but then comes the reckoning. Does the currency rise or fall? Long-term interest rates? These questions don't need answers though, because it's theoretical. BofA thinks the Fed is among the most likely to tighten:

This suggests that inflation pressures and overheating are more likely to force the hands of the Norges Bank, Riksbank and the Fed to stop easing/tighten, while the ECB, the BoJ and the SNB are likely to retain a loose monetary stance and even ease policies more.

And the dollar bull market will resume with a vengeance.

Market to Central Bankers: Do You Feel In Charge?

In the near term, the rally in the yen points to equity market weakness. Longer-term, the market may realize the central bankers have far less power than imagined.

ZeroHedge digs into the yen situation: USDJPY Crashes, Drags Equities With It As Gold Soars

“The yen is being driven higher by risk aversion and by market participants testing the BOJ’s tolerance toward a stronger currency,” said Thu Lan Nguyen, a foreign-exchange strategist at Commerzbank AG in Frankfurt. “Japan doesn’t want to give the impression it’s planning to intervene given it’s hosting the next Group-of-Seven summit. There’s also a perception that it has very few measures left to aggressively ease monetary policy."

Japan’s government is watching yen movements with vigilance, Chief Cabinet Secretary Yoshihide Suga said for a third day Thursday. Excessive currency moves have a negative impact on the economy, he said.

“If Japanese officials start saying ‘will take bold action if necessary,’ then it is time to be wary of the risks of market intervention,” said Joseph Capurso, a currency strategist at Commonwealth Bank of Australia in Sydney. “In any case, history shows market intervention by the MOF via the Bank of Japan does not lead to a sustained weakening of the yen.”

Did Central Bankers Intervene to Prop Up CNY By Devaluing USD?

From STA Global: DID CENTRAL BANKERS JUST SAVE THE WORLD? (launches PDF)

In the following weeks, everything seemed to change when European Central Bank Governor Mario Draghi and Bank of Japan Governor Haruhiko Kuroda did something entirely out of character. Rather than pushing down on their currencies and driving the dollar higher, they appeared to intentionally disappoint foreign exchange markets and allow their currencies to strengthen.

When Janet Yellen and her colleagues at the Federal Reserve could have taken advantage of a golden opportunity to hike the federal funds rate (according to their policy models), they held steady, reduced their 2016 tightening projections from four rate hikes to two, and expressed continued concern for global economic and financial stability.

Perhaps Beijing threatened to free-float the RMB and unleash hell if major central banks continued to drive the US dollar higher. Perhaps they pleaded for an opportunity to avoid the unthinkable. But in all three cases, the European Central Bank, the Bank of Japan, and the Federal Reserve began to act in a way that weakened the US dollar, made it easier for China to manage its capital outflow dilemma, and supported a reflation in global commodity prices.

...Again, we’re watching closely for signs of more lasting intervention. But should this weak US dollar environment persist, we believe it may be favorable for equities, politically stable emerging markets, commodity producers, and midstream master limited partnerships (MLPs) in particular. If, however, policymakers are unable or unwilling to do what it takes to change the US dollar’s long-term upward trajectory, then all these pressures will likely return as the Fed hikes interest rates more aggressively in the face of growing inflation pressures. Until we see more signs of confirmation, we intend to move slowly and cautiously...

I remain long-term bullish on USD and bearish on yuan, but if global central banks successfully coordinate a devaluation of the U.S. dollar in order to avoid a large CNYUSD depreciation, this is a major step towards dislodging the U.S. dollar as global reserve currency because it signals the subordination of Federal Reserve policy to global forces, specifically China.

If central bankers have indeed enacted this strategy (skepticism is warranted for now), I expect the Fed will be panicking by autumn. Crude oil year-on-year comparisons start looking very inflationary starting in July, should crude prices climb into the $50 range or higher.

Whatever the case, right now I prefer to be long gold miners and short various assets. If the dollar weakens, the gains in gold mining shares should do as well as other natural resource producers (though it would pay to rotate out of Canadian and Australian miners and into U.S. miners). If the bear market resumes, the shorts will hopefully pay off and, if lucky, gold prices will hold up in foreign currency terms or even rise in USD as investors price in central bank intervention.