09/15/10 St. Louis, Missouri – The Bank of Japan finally intervened in the markets last night, selling yen (JPY) for the first time since 2004… I had warned you that this would come about, and now it has… The BOJ came in with both guns a-blazin’, just like I told you they would, and moved the level of yen from its lofty level of 82.88 to 85.20 this morning.
Will this stop the yen from moving higher again, and what happened to the other currencies? Ahhh grasshoppers, I knew these would be the next two questions you would have for me this morning…
First… Look at the intervention this way… In most cases, a central bank intervenes, which ticks off the traders, and the traders push back, and eventually win, for the markets have far deeper pockets than most central banks… But this is the BOJ, it has a treasure chest of reserves from years of trade surpluses, so this push and pull between the markets and the BOJ could go on for some time, and in this case I believe it will.
So… Be careful with yen, going forward… The intervention is here, and it looks as though the Japanese have drawn a line in the sand at 83… Any push below 83 by the markets will be met with intervention… And remember, the Bank of Japan just carries out the intervention… The directions come from the Japanese Ministry of Finance… And for those of you keeping score at home… The total was between yen 0.5 trillion to yen 1 trillion… So… If we split the difference, and say it was 0.75 trillion, that’s a lot of cash! And there’s more of that cash to spend… Like a good friend of mine says when we’re out… “Hey, I’ll buy. I still have money I haven’t spent yet”! HA!
And the other currencies? Well, they got caught up in the yen selling, and the lofty figures they enjoyed yesterday have been lost, for now… Just for grins though, the euro (EUR) was 1.3030 yesterday afternoon, the Aussie dollar (AUD) was 0.9450, and the Swiss franc (CHF) was back to parity versus the dollar… You’ll see in the currency round-up the new figures today…
But Shoot Rudy, I think the markets will get used to this BOJ intervening and get back to the task at hand, which is taking the dollar to the woodshed. Hey! Just because the BOJ intervened last night, doesn’t mean the Fed is going to shelve their plans to implement additional quantitative easing! No sirree Bob! More quantitative easing is on the way, folks… Just like I could smell Japanese intervention coming, I can smell more quantitative easing coming here in the US.
So… What does this backing off yesterday’s lofty figures do for us? Ahhh… Again grasshoppers, if it does one thing, it provides a cheaper level to buy today!
What put the wind in the currencies’ sails yesterday? Well… It was a combination of the lingering affects of the two strong Chinese economic reports we talked about on Monday, and… US retail sales, which, while bolstered by back-to-school sales, were better than expected at +0.4%… Like I told you yesterday, nothing to get all lathered up about for us here in the US but for the foreigners, they liked it, for it at least showed that the US consumer isn’t dead…
And gold? WOW! At one point yesterday the price of gold was up $23 on the day! And that, of course, led gold to a new all-time record level of $1,271.70… Silver kicked some sand in the dollar’s face too, rising well above the $20 level. I was sitting here in the saddle, and made a statement that I don’t think many people heard, as they were all busy on the phones, that went something like this… “See, I told you yesterday that gold fluctuates in the early part of a risk reversal, and then rallies, and look what’s happening today.”
I was patting myself on the back, but no one noticed, so I went ahead and got back to work!
So… Today, we have “the hangover”… The currencies and precious metals partied like it was 1999, and then got cut off by the Bank of Japan, and woke up this morning, with a splitting headache. Like I said above, the prices of the currencies and precious metals are cheaper today than they were yesterday, and that is the hangover… (Now, my cure for such a thing is a Quarter Pounder with Cheese, but the currencies and metals can’t go for that.)
What the currencies and metals need to cure their hangover is simply for investors, traders, etc. to come back to the table and buy them up again, and say NEENERNEENER to the Bank of Japan!
Today… The US data cupboard, has my fave piece of economic data for it is a “forward looking” piece of data… And that is… Capacity Utilization, which is normally coupled with Industrial Production… Capacity Utilization, while reflecting better levels in recent months, is still suppressed from the lofty levels of the high 80% in the go-go days of the late ’90s… Expect Capacity Utilization to be around 75%, and not really telling us anything new…
US stock futures are down this morning, which doesn’t bode well for stocks here in the US today… And, since the financial meltdown, the risk assets of stocks, currencies and metals have been lumped together, with only a few breaks along the way, that doesn’t bode well for a return to the lofty levels of yesterday for currencies and metals… But that can change quickly in today’s markets… Volatility has become the norm, for sure!
I see the US administration is taking credit for the “big salad”… For Seinfeld fans, you’ll recall the episode where George thinks Elaine gave his girlfriend an incorrect thank you when it was actually George who paid for Elaine’s lunch (a big salad)… And the mayhem that ensued from taking credit for something when you had nothing to do with it…
And so it is (as I see it) with the US administration, with regards to the rise in the Chinese renminbi (CNY) versus the dollar in the past week… Was it really a result of Larry Summers, the head of the President’s National Economic Council, meeting with Chinese officials last week? OR… Was that just a co-inky-dink? I’m of the opinion that it was the latter, which is why I went into the big production on the Big Salad! I saw that US Treasury Secretary Geithner, was beating his chest, and saying that the Chinese listened to Summers last week, and that’s why the renminbi has rallied the past week…
Hmmm… Since the Chinese have never really listened to anyone that came to talk to them about the renminbi in the past, I’m going to think that they didn’t listen to Summers either, and that this run by the renminbi in the past week that has moved the currency to its highest level since 1993 versus the dollar, is simply the Chinese trying offset the rising inflation level in their country with a stronger currency…
The Big Salad… I wonder if the writers of that episode ever thought that it would become the “Kleenex” or “Xerox”?
Then there was this… From Bloomberg:
US state pensions such as Illinois, Kansas, and New Jersey are in a “death spiral” with assets at many insufficient to cover benefits, payouts consuming a growing portion of resources and costs rising twice as fast as investment gains. Less than 1/2 of the 50 state retirement systems had assets to pay for 80% of promised benefits in their 2009 fiscal years. A year earlier on 19 missed the mark… Michael Aronson, who manages $295 million Marketfield Fund of stocks, says that once states force their fund managers to keep money in short-term low-return investments to pay benefits, thus reducing chances pensions can earn their way back to financial health, the pension is then in a “death spiral”…
And investors are scared of Greece’s debt? As they always say… Look in the mirror…
To recap… Japan intervened for the first time since 2004 last night, and spoiled the currency and metals party versus the dollar. Currencies and metals had rallied strongly versus the dollar yesterday, with gold reaching a new all-time record high, and the Swiss franc reaching parity versus the dollar again. But the yen intervention (selling yen) has taken the bloom off the rose, and currencies and metals have lost those lofty levels of yesterday, thus giving buyers a chance to buy at cheaper levels today!
Chuck Butler
for The Daily Reckoning
Chuck Butler
Chuck Butler is President of EverBank® World Markets and the author of the popular Daily Pfennig newsletter, which is reposted here at The Daily Reckoning. With a career in investment services and currencies extending over 35 years, Mr. Butler oversees all aspects of customer service and the trading desk for EverBank World Markets. A respected analyst of the currency market, Mr. Butler has frequently made appearances or been quoted by the national media. These include the Wall Street Journal, US News and World Report, MarketWatch, USAToday, CNNfn, Bloomberg TV, CNBC, and the Chicago Tribune. Mr. Butler was previously the Chief International Bond Trader and Director of Risk Management for Mark Twain Bank, and has held significant positions in the investment industry since 1973.
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