Here we go again. Bank of Japan Governor Kuroda “shocked and awed” the markets by taking BOJ deposit rates into negative territory in a HYBRID sort of way as it is a three-tiered methodology that does not apply to money already being held at the BOJ in reserve. Also, money that is deemed regulatory-type capital will receive ZERO interest and won’t be punished with a surcharge, but any new funds making it onto the reserve balance sheet of the BOJ will receive NEGATIVE INTEREST RATES. Kuroda-san delivered this shock after promising last week that the BOJ would not go negative on its deposit rate. Kuroda will learn hat if you keep intentionally pumping the markets with disinformation the markets will have their time when the BOJ needs it the most, like maybe selling off the massive JGB portfolio on its balance sheet. But through the power of negative compounding of interest earnings Kuroda has brought Stevie “Guitar” Miller’s words to life:
“Your cash ain’t nothing but trash and there ain’t no use in hangin’ around.”
So all Japanese bond and currency investors, take your money somewhere else. We don’t want it anymore. There were many suppositions about why Kuroda decided to surprise the markets. First, the BOJ governor cam under immense pressure at Davos to do something to generate an increase in Japanese inflation.
Another problem for Kuroda was that the architect of Abenomics, Amari, resigned this week putting more pressure on the BOJ to act. I am not accepting either of these reasons because the vote for NEGATIVE RATES was 5-4 in favor, so the decision for Kuroda was very contentious. If the pressure from outside sources was great and/or the domestic political situation so frought with risks, Kuroda would have been able to get a consensus rather than a close vote for the change in policy.
Secondly, In my OPINION Governor Kuroda went negative to impact the recent depreciation of the Chinese YUAN. It is noted that Kuroda was on the record at Davos advising the Chinese authorities to IMPOSE EXCHANGE CONTROLS to stem the outflow of hot money from China and thus slow the downward pressure on the YUAN. Instead of using reserves to slow the YUAN‘s depreciation capital controls would slow to a trickle the selling YUAN, especially by the speculators. The Wall Street Journal published an article online titled, “Currency War: U.S. Hedge Funds Mount New Attacks on China’s Yuan.” It said some of the giants in currency trading–George Soros, Kyle Bass, Stanley Druckenmiller, David Tepper and David Einhorn–are taking LARGE SHORT positions on the YUAN in an anticipation of a large depreciation of the currency.
Last week, the main Chinese newspaper warned Soros about speculating against the people’s money. A major depreciation of the YUAN would result in a world-wide depression as it would force the Chinese to export deflation around the world through its EXCESS CAPACITY and weaker YUAN. It seems that KURODA wants to prevent the Chinese export of deflation around the world for the global debt load overhang is too large to deal with a renewed bout of GLOBAL DEFLATION. Exchange controls may be painful and a short-term fix but it appears that Kuroda is suggesting that it would be best for the world to avoid a YUAN depreciation. The large short YUAN position by the great minds of global macro is based on the horrendous balance sheets of Chinese banks. The only way to stem a raid on the currency is to raise interest rates to a high enough level to reverse the outflows, which would be a disaster for an overleveraged domestic economy.
So Soros, Bass et. al are betting that the Chinese have no alternative but to let the currency slide. The short YUAN is the logical outcome of global macro fundamentals, but be careful following in the path of elephants, especially if the Chinese authorities make a stand against the speculative capital. The G-20 could call a meeting and invoke some type of accord to have the FED and others develop policies to prevent the slide in the YUAN initiate a global depression. The Chinese could also create a GOLD-backed YUAN, which would make it a desirable holding for global investors. This is just the beginning of the currency wars as the BOJ has created the SPARK TO START A GLOBAL PRAIRIE FIRE.
My long-time readers have known that I’ve been a fundamental bull on GOLD but a technical bear to neutral. At the time of the ECB meeting I suggested that the gold/Swiss was a buy and that it could be the stairway to haven. The GOLD/SWISS had rallied strongly above its 200-day moving average. Well now the GOLD/EURO and GOLD/YUAN both closed above their 200-days for the week. In order to generate a total bullish scenario, the GOLD/YEN will have to have a weekly close above its 200-day, which is presently @137.243 YEN to an ounce of GOLD. On Friday the cross closed at 135.280 so we don’t have a complete picture of GOLD versus fiat currency.
To fulfill the entire technical picture, GOLD in terms of U.S. dollars would have to have a weekly close above its 200-day moving average, which is currently 1133.10 on a daily continuation CQG chart. We have not had a complete technical picture in several years but with the Japanese announcing that YOUR CASH AIN’T NOTHING BUT TRASH. We need a haven. My opinion has constantly been that GOLD‘s rally would come not from the onset of a small amount of inflation but when the FEAR OF DEFLATION WAS RAISED TO A LEVEL THAT CAUSED THE WORLD’S CENTRAL BANKS TO PANIC. If Soros, Bass et. al have their way with the YUAN the time is well-nigh.