Thursday, August 12, 2010

Extreme sport FX-devaluation

The biggest loser from recent US monetary policy has been the Nikkei, which has seen a 6.2% top to bottom move since the FOMC announcement through the US/JP rate spreads driving USD/JPY and hence, the Nikkei. This, of course, is being exacerbated by the Yen being the new default counter currency as we are so keen to sell everything else (see below chart: USDJPY - white, Nikkei - orange, 2yr US/Japan yield spread - yellow, 10yr US/Japan yield spread - green).


So we are back to a good old fashioned FX theme of trying to guess if the BoJ will try and do something about it and how. If they come in and buy cart loads of USDs there is no way they then want to park them back in Treasuries, as it is the US/JP yield spread compression that is the original cause of the problems. In fact, probably the best way for them to intervene is to sell their holdings of treasuries and bring it back down the curve and hold it as cash and hope it starts spreads widening again. Does that mean that Joe Public is paying back his maturing mortgages to Japan via the Fed taking the cash off their MBS maturities and using it to buy their Treasuries back from Japan? But what happens to the cash? The Japanese put it on deposit where it finds its way back onto to bank balance sheets and they use it to buy Treasuries again. Hmmmm.

Perhaps they should take the USDs in cash, actual paper notes, and burn them, effectively destroying the problem of too many USDs. So they can effectively print their own money and get the double whammy of QE'ing themselves, while deQE'ing the US. The extreme sport version of competitive devaluations, where you actually try and destroy someone else's currency faster than they can print it. If this took off seriously it would make Mugabe mighty bid as Finance Minister. So much for Austrian Economics, how about following the Zimbabwe school? Is there any value in burning money? TMM once worked out the price of oil needed to make it cheaper to burn Dollar bills instead in terms of cost per Kj output. From what we can remember, it came out at about $360,000 per barrel. Some way off yet, but if Voldemort is going to join in and burn his USD reserves that’s about 7,000,000 barrels of oils worth.

Though that may sound absolutely ridiculous it appears the money multiplier has gone into parabolic hyperspace where nothing is impossible.

We are afraid that this is all still heading towards more and more blatant FX manipulation which just increases the chances of trade sanctions and tariffs. The gloves may not yet be off but their laces are undone, so for now the market is back in prodding mode and will keep it up on JPY until they get something more substantive than today's BoJ mumble which came straight out of their ancient book of obfuscation.

The general panic mood of yesterday seems to have faded and as the dust clears we see a new landscape revealed with Euro center stage and previously neglected Euro-negatives being pulled out of the draw and dusted off. But this is not feeling like a general panic and is sectoral now rather than general. In fact, we are only back to levels we were at a month ago in most things and "most things" charts all look the same these days. So we look at this, so far , being a positional and reality rebalancing back to middle of summer range rather than the start of the "next big thing". And though a complete guess, it wouldn't surprise us if the next big thing involved a PIIS poor bank catalyst. The "G" has gone already, and so we hereby copyright the use of the term "PIIS" and all such headlines derived therefrom, such as "PIIS poor" etc.

13 comments:

Nic said...

The SNB had a good lesson in that too. I wonder what they are thinking as they look at the EURCHF today.

Good story in the Guardian yesterday:
"The economic fallacy of 'zombie' Japan"

CV said...

I am almost moving in with a formal call for USD/JPY intervention by the BOJ here ... almost! Last time, I cried wolf and was, well eaten.

Not easy to see what the BOJ wants here, but the JPY as the new/old/new (?!?) safe haven currency is bad for Japan.

Claus

Leftback said...

Claus, been there, lost a toe (or two) in USDJPY.

Japan... what a complicated and contradictory nation, and how little understood by us outsiders. The peace and tranquility of Japan's orderliness are a delight to a visitor from more chaotic places, where selfish individualism is the rule. Yet the collectivism and civic spirit so evident on Japan's surface still masks deep inter-generational conflict and a rigid society that supports outmoded business and educational structures and actively represses any challenge to the status quo. There is much to admire in Japan, but try starting a new business that challenges the existing order and you will find steep barriers.

I find this topic of especial interest, not only because we have already embarked on a program of Japanese economic policies (which Bernanke has followed almost to the letter) but because we are already seeing the emergence in the US of a Japan-style keiretsu, in which corporations and banks support each other (in Japan, this was by buying each other's stocks and bonds), while government regulation stifles the entry of new businesses, under the guise of "reform". Try starting a new bank in the USA, even a small one, and you will see what I mean. The two-party system in Washington is defending the members of the banking/shadow banking cartel. The Quiet Coup, indeed.

Apologies for long post, TMM...

Leftback said...

When I start seeing this kind of stuff everywhere, I begin to think that we have just seen a short-term low in Treasury yields for Q3:

Hedge Funds Pile into Treasuries

One wonders if some of these HFs "piling in" on the long side are the same as the ones that were "loading up" on the short side when Taleb urged "every human on the planet" to short USTs in February.

At the risk of [pennies/steamroller], we would hazard to say that there might be some money to be made further out on the risk curve, at least for a while, unless a full-blown European crisis recurs, which eventually it will....

CV said...

Right LB,

When will them yields increase. Although, is it inconceivable that the the US will experience inflation AND low yields. I don't think so ...

On the JPY, I am very close to jumping the band wagon here at 87ish. Yet, after getting pummelled earlier in the EUR/USD short squeeze I am leaving FX for the moment (although, I soo should have sold the Aussie at 0.92). Ah well ... hindsight is particularly useless in this business :).

Claus

highlowbrow said...

Burn the USD? We have enough climate change already, go ask any Russian. And anyway wouldn't that leave the BOJ insolvent?

My advice is build a floating island of dollar bills in Tokyo bay, sell the land, and use the proceeds to purchase USD in the open market. Voila, problem solved.

phoenixwoman said...

Japan is one earthquake away from serious devaluation.

--Charles

Nic said...

The yuan did a bit of devaluing this week. Plus ├ža change

action said...
This comment has been removed by the author.
gk said...

I feel that this time intervention should result in more downside for equities.

Leftback said...

2s10s watch... 216 bps.... the crushing continues for those who had the recovery trade on. Actually, this move now seems a bit extreme in the short run.

FX said...

TMM, I think its time to evolve the TMM STFU Eurozone Indicator.

Above 2100 in EU, the news/movement ratio should prove sensitive.

Now that USD is trading in a band that's conducive to the risk on/off correlation,Our third team in the second half may just be our leading indicator for when we hit the bottom of the risk-off trade across the planet,I'm betting the fx guys lead the way.

Leftback said...

This has been one of the more interesting episodes in the history of fixed income investing. One day we'll look back and laugh..... laugh, I nearly cried...