Tuesday, January 15, 2013





The comment, earlier today, from the Japanese Economics Minister, Akira Amari, that the Yen exchange rate was now “ in line with fundamentals”, and the market’s quick back-up reaction, got me a laugh, and has me thinking. Have things changed so much? Or is this just an illusion?


It was not long ago that we had the complete reverse of what we have today. Prior to 2009, markets were the dominate forces that determined the outcome of “things”. Government leaders and finance officials have been talking for decades, they never got markets to “behave” as they wanted to before. That’s completely changed. At least that appears to be the case.


As an example, consider what Mario Draghi accomplished last summer by merely mentioning the word “unlimited”. The markets immediately bowed to the new, all powerful, Deity. Those markets are still in subservient mode, yet Draghi never really did a thing, except talk. The underlying problems in the EU are worse today than last summer, but the financial crisis has functionally disappeared.


As far as the efficacy of Central Bank currency intervention is concerned, one need look no farther than the utter failure of the BOJ to contain the appreciate of the Yen over three decades. It tried to talk the market up, it intervened again and again, but the Yen continued to rise. For many years, the market conclusion was that the more the BOJ bought –  the more the market would demand.

My observation:

The BOJ was on the defense all those years, it was never on offense. A central bank that gives up the offense to the market, creates a situation where the market will exploit the weakness in an attempt to make a profit.


Note: The Bank of England’s big losses in the 90’s to the FX market, as well  the endless money that was made from 1970 through 2011 at the expense of the Swiss National Bank, are other example of CBs that were on the defense, and fed the “kitty” for the markets.


Where ever you look around the globe today you see evidence that the monetary authorities have achieved the offensive. They have complete control of both the direction and volatility of markets. The best evidence of this dominance is Bernanke’s magic of setting the return on tens of trillions of dollars of long term securities at rates that will produce a negative return against inflation. There can be no other conclusion, but that the US capital market has folded its cards, and Bernanke has won. At least for now.


This takes us back to Mr. Amari’s comments today. He thinks that now that we have had a back up in the Yen crosses, the FX markets should just go to sleep, and trade in narrow ranges. As of now, the markets are again bowing and scraping to this type of talk. 


It could turn out differently. It might just be that those finance types in Tokyo have unleashed some very powerful forces. These forces will not get contained by talk that things are now “balanced”. Two factors:


- The market is very well aware of the fact that BOJ WILL NOT stop additional Yen depreciation by reverse intervention (at least not for the next 1o big figures). This reality sets up an asymmetrical risk situation. There is no “lid” on USDYEN.

- The “market” has made a true fortune on the short side of the Yen trade the past six months. This “made” a few big firm’s year. This set-up ALWAYS leads the market players, who now have a big pile of chips in front of them thanks to the “house”, to press on with the betting.


We have in front of us what might prove to be the first test of the new found “dominance” of the CBs and the talkers.  I think it’s likely that USDYEN moves up another 10%. That could happen pretty quickly. There is nothing in the way, and the argument that an FX rate is now “fair”, is irrelevant. The simple fact is, there is money to be made on the short side. It’s just a question of timing.


In the immediate future there is a real question for the dollar. What’s going to happen with the debt limit and related issues? Will America shoot itself in the foot? With that in the air, the USDYEN, and the Yen crosses, might take a breather for a spell. But I think it will prove to be a pause in the action.

The Yen is going to get cheaper. Cheaper than the Japanese want. Cheaper than America wants. Cheaper than the EU, China and the BRICs want.


When that happens, it will be fair to ask:


“Are those talkers and CB’s really in charge? Or was that just a phase we passed through?”


And if so,


“Who’s next?”






The most recent example of finance types dominating markets comes today.




  1. Thanks Bruce enjoy the posts!

  2. The Yen’s move has nothing to do with the Bank of Japan — and everything to do with China’s energy needs


    If anything, central banks are losing influence

  3. Bruce, what if anything, doyou think about this BI article on currencies?


    Looking at EUR/CHF it feels like the SNB might not be straining to hold the peg.

    • (1) Any website that promotes hustlers like Henry Blodget should be taken with a grain of salt (actually he owns part of BI, since he is banned from the securities industry for life)

      (2) if we are in the midst of a global currency regime change, why would anyone sell Yen to buy US dollars? The US dollar is the center of the “current global regime” (it is the global reserve currency). And the US is pursuing the same disproven policies (negative real interest rates, wasteful fiscal spending on political cronies, etc) that have destroyed Japan. Why would anyone jump out of one mess (Japan) into a different mess (USA)?

      That explanation (changing currency regime) makes absolutely no sense what so ever.

    • BI tends to go a bit over the top in its articles. This one no different. A regime change?

      But…things are different today than a few months ago. Things are unstable from that “normal”. The Yen and CHF have changed roles, they are not “safe havens” any longer. The Euro is very strong (too strong for me).

      I also believe that the old stability is not going to be returned anytime soon. Instability in FX will roll over to equities if things keep up.

  4. maybe all the FX traders were glued to the FB conference today. Or can’t a consolidation day coincide with a brief comment from the economics minister.

  5. Enjoy your comments Bruce. Do you think the recent move by the Bundesbank to repatriate gold will do anything to shock things up on the FX?

    • What I find interesting about the Buba gold is that it will take 5+ years to move the gold. Long time for no reason that I can see. Just put a 1/4 tonne in each Lufthansa jet out of JFK. Insurance would cover the transit risk.

      So what is up with this???

      • You have to pay for the cost of the armored cars & security from FRBNY to JFK and from Frankfurt airport to whatever secret Buba vault. And the insurance costs on the Lufthansa flight aren’t free either You have to make bigger shipments than 1/4 tonne or the “administrative overhead” would dwarf the benefits of the gold itself. A few German military transport aircraft could ship the entire 300 tonnes in a handful of trips. Given that “everyone” knows the shipments are happening (security risk), having really large shipments would make any in-transit theft impossible — most NYC construction companies have trucks to haul a 1/4 tonne, but very few have trucks that can handle 25-50 tonnes. Even a large gang attacking the convoy could not transfer 25 tonnes into little trucks quickly. I doubt that shipping costs or logistics are the issue

        You are making the assumption that the top secret Buba vault has enough free space to store the extra 650 tonnes of gold — the 300 from FRBNY plus the other 350 tonnes they are repatriating from the baguette for brains in Paris. Creating extra space in their vault (either new construction and/or clearing out existing “shelf space”) might take a few years.

        And if I had to guess, the Germans are probably a lot more concerned about the geopolitical risks of keeping their gold in bankrupt France than they are in the vault of a reserve currency bank. That doesn’t mean the US government is zero risk (is most certainly is not). It means that Paris is a far bigger risk to the Germans than New York or London.

  6. Hello, all is going perfectly here and ofcourse every one is sharing data, that’s genuinely good, keep up writing.

  7. This is a brilliant inspiring blog post Akira Amari, that the Yen exchange rate was now “ in line with fundamentals.You put actually very supportive knowledge I am pretty much happy with your brilliant work. Keep it up. Keep blogging. Looking to reading your next blog post.