Notes From Underground: Kan shakes off the threat from Ozawa

The political turmoil that has roiled the markets has been resolved and Japanese Prime Minister Naoto Kan handily defeated the old warhorse, Ichiro Ozawa. The DOLLAR/YEN was sold off as the markets were attune to the Kan victory. Ozawa was presumed to lead a battle for Japanese intervention to stem the YEN strength. Now it seems that the markets have been resolved and the present regime will allow the markets to set the YEN rate, which is being interpreted as further YEN appreciation.

The YEN was not the only strong currency as the DOLLAR was sold off against all currencies excepting its NAFTA cousins, the loonie and peso. We don’t know what led to overall DOLLAR weakness, but the biggest reason reported by the Talking Heads was the fear of a second round of QE by the FED. Why the markets chose this reason today is beyond our analytical abilities.Our readers know that we have been on this issue for a long while and we will say it again: THE FED FEARS DEFLATION MORE THEN IT FEARS ANYTHING ELSE.

Today’s retail sales data gave no hint of new weakness, so again, we don’t know what the markets saw today that roused new fears of QE. The U.S. equity markets basically closed unchanged after an early rally failed, but the risk-off scenario was not in play. The EURO staged the strongest of rallies but without  a full-blown RISK ON profile, we are scratching our heads and wondering WHY.

The Canadian data today was better than expected, adding to the positive global growth story. Again, we wonder again why North America was the object of the markets unease. The SWISS and JAPANESE YEN have been major recipients of the safe haven risk-off profile, so if the game was solely RISK ON the YEN and FRANC should have been sold. But the currencies rallied substantially as today was just a SELL-THE-U.S. DOLLAR DAY.

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5 Responses to “Notes From Underground: Kan shakes off the threat from Ozawa”

  1. GreenAB Says:

    to me CHINA is the driving force behing these FX moves.

    my theory back in july was that once they were forced to let the yuan appreciate again they decided to weaken their direct export competitors (europe, japan) by buying their currencies.

    that need to hurt competitors became less urgent when they curbed the yuan appreciation and let their currency even fall.

    now with renewed pressure from the us (house comittee discussion tomorrow) they are back to the old cat and mouse game – let the yuan rise again.
    and hedge that by keeping a steady bit under the euro/yen.

    i guess there are still market participants who are not aware of this influence and who still play some kind of risk asset correlation, which doesnt´work anymore.

    and sometimes those players will get squeezed (like yesterday in the euro).

    so watch what china does. if they weaken the yuan again, that will take pressure from the dollar against major currencies.

  2. yra Says:

    Green AB–good piece of analysis and you capture well the politics of it—-The chinese are going to be impact many currency relationships as they move assets around the world.The interesting thing for me is the role its sovereign wealth funds will play and if CIFIUS doesn’t back off the U.S. may lose out on some needed investment.I agree that the risk on risk off algo is beginning to breakdown and that is going to change the whole dynamic as we revert back to fundamentals as the main driver

  3. Danny Says:

    It looks like the Japanese actually swung their stick a little bit instead of continued lip service. However, my first thought is: without joint intervention and without action against non-USD cross rates, namely the Euro/Yen, the Japanese have not effectively used “overwhelming force”.

    So there seems to be plenty of opportunity for the market to test just how serious the Japanese are about defending the 82-85 level agains the USD.

    Do you think this action will effectively work in Japans favor? Or do you think this was little more than a small prick on the backside of an elephant and without joint intervention or at the very least concentrating on the Euro/Yen…the JPY and the Japanese economy are doomed to struggle for a while longer thus the USD/JPY will soon be back at its highs?

  4. yra Says:

    Danny we are going to find out just how serious this is –will write about it this afternoon as conspiracy theories abound and some are suggesting how this plays into chinese hands

  5. GreenAB Says:

    good piece by Tim Duy:

    http://economistsview.typepad.com/timduy/2010/08/renminbiyendollar-collision-course.html

    “…Now, suppose Japanese officials believe that intervention is required regardless of the G-20. Presumably, they will give US Treasury Secretary Timothy Geithner a phone call to at least keep him in the loop, if not to receive his implicit consent. One wonders if Geithner will recognize what he would be consenting to: Japanese intervention, if it occurs, means that Chinese authorities managed to get Japan to acquire their Dollar reserves for them. Instead of buying Dollars, China buys Yen, which in turn induce Japan to buy Dollars. This maintains the artificial capital flows to the US while allowing China to escape accusations of being a “currency manipulator.”…

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