Notes From Underground: Arthur’s Song, Lost Between the Moon and New York City

A long-time reader of Notes From Underground posted a comment to a previous post promoting long GOLD/short YEN. When I asked him about this trade he noted the onset of currency wars. There is no question, as I have regularly shown that many foreign central banks’ currency’s strength is a reason to maintain very low interest rates and if in place QE programs. I certainly agree with Arthur about this narrative. But from a relative value perspective the Japanese yen has already benefited from its weakening versus the EURO, Aussie, Kiwi, Canada and Swiss franc.

While the BOJ appears to be on a destructive course with its QQE to infinity I doubt the G-7 will tolerate further weakening of the YEN. The EURO/YEN cross is threatening its 200-MONTH moving average indicating it is approaching mean reversion over a 16-year period. The German automakers will not be pleased with the YEN weakness because of the competition in the luxury auto market, a correlation I called the Mercedes/Lexus spread.

Also, the important Yuan/YEN is breaking through the 200-DAY moving average as the YEN weakens against another key global market (presently 16.536 with the m.a. 16.427). The recent price action may be indicative of YEN weakness but Arthur’s contention with a global currency war which requires some analysis.

Again, the BOJ is engaged in a massive liquidity program. But as Governor Kuroda and others have stated, the BOJ may be able to impact its control of the yield curve with far less JGB purchases because the bank already controls a great proportion of existing Japanese sovereign debt. Bottom line: It takes far less in purchases to control the market outcome. While there has been $80 billion a month of equity and debt purchases, the BOJ may quietly taper because there is just not enough SOVEREIGN DEBT to purchase — less is effectively more. The JGB is badly broken as the world’s second largest debt market fails to trade on some days and if it does trade it is by appointment only.
The GOLD piece I certainly agree with as investors tire of the narrative set by the world’s central banks. There are many analysts still voicing doubt about GOLD because of the lack of inflation in the global financial system. An analyst I hold in high regard continues to repeat the mantra that the FED is captured by history leading them to fear inflation more than DEFLATION.
I believe that this is a GRAVE error that many analysts make. Over the years I have written ad nauseam about the Bernanke Fed being impacted by Ben’s work on the FED and Treasury moves of 1937. It was a promise that Bernanke made to Milton Friedman on his 90th birthday that the FEDERAL RESERVE would not make the mistakes of 1937 again. In recent times we have experienced the two-decade-long Japanese deflationary spiral. The fear of deflation results in the FED‘s asymmetric policy of raising rates in 25 basis point increments while slashing rates in much larger percentages.
Yes, the YEN faces a future of great uncertainty as it comes to deal with the massive balance sheet build-up by the BOJ. But if the world is bent on currency conflict then the YEN WEAKNESS will be a target of many nations concerns. The SWISS FRANC has certainly been involved in currency intervention as it has increased its foreign reserves over the last seven years from roughly 100 billion Swiss to a now 715 billion, which most of the accumulation having occurred over the last three years.
My argument has been and continues–as the SNB PRINTS BILLIONS of SWISS FRANC to sell in order to prevent the dramatically rising I WONDER WHAT ENTITIES HAVE BEEN ACCUMULATING SO MANY FRANCS DEFYING THE WILL OF THE SNB. Yes, the SNB have performed the greatest alchemy in financial history as it exchanges newly printed fiat currency for real corporate assets (i.e. APPLE STOCK.)
At a time when the SNB has actually managed to weaken the Swiss franc versus the EURO  SNB President Thomas Jordan OUGHT to be buying back some of the francs and selling its EUROS. Unwinding its massive foreign reserve portfolio. But as Peter Boockvar discussed in an FRA PODCAST, the SNB is trapped because any hint of SNB buying of Swiss francs would lead to a sizable rally. The EXIT from QE programs will be far more difficult than their beloved models have predicted.
***Key points as the summer comes to an end:
1. The Swiss/yen is flirting with the 200-day and week moving averages;
2. On Monday, SILVER broke above its 200-day moving average. It’s important to see how silver performs relative to COPPER.!The momentum in the copper rally has been breathtaking but if the copper rally is emblematic of global growth then SILVER OUGHT to perform well because it has an industrial and monetary use. Silver has been deemed the poor man’s gold as a store of value in uncertain financial/monetary times;
3. Yuan/yen is flirting with the 200-day moving average, even in the time of concerns about the Chinese economy. This further challenges the view of copper as predicting robust global growth; and
4. The German DAX has bounced off its 200-day moving average of 12006.6 as some investors are concerned about the strength of the EURO on the corporate profits of German multinationals. This is something to watch as the market digests the impact of a stronger euro on European growth. In a time of complacency there is much to digest .Also for the traders of European sovereign debt, the ECB needs to buy 14 billion in assets by the close of Thursday to meet its monthly 60 billion target (h/t Karl).

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12 Responses to “Notes From Underground: Arthur’s Song, Lost Between the Moon and New York City”

  1. Richard H Papp Says:

    It seems the BOJ is deluding themselves with the illusion that they have a bond market.
    For what its worth on this traumatic morning I have price target of 107 on Yen with a stop on a close above 111. At 9:15 AM the yen was 108.52. So, I am partially right. Have a good day!

  2. Financial Repression Authority Says:

    […] Notes From Underground: Arthur’s Song, Lost Between the Moon and New York City […]

  3. Yra Harris: The Exit From QE Programs Will Be Far More Difficult Than Central Bank Models Have Predicted.” - Investing Matters Says:

    […] Notes From Underground: Arthur’s Song, Lost Between the Moon and New York City […]

  4. Asherz Says:

    If you haven’t read Matt Taibbi piece on new revelations about LIBOR in Rolling Stone, here it is.

    http://www.rollingstone.com/politics/news/taibbi-is-libor-crucial-financial-benchmark-a-lie-w497305

    Remember when markets used to be when legitimate buyers and sellers got together to set a market price? And people who painted the tape and indulged in other shenanigans were put in jail? The Buttonwood Tree is a fond memory.

    • Yra Says:

      Asherz–thanks for the post as it is really significant.As Santelli reminded us today the JGBS trade by appointment only as the central banks have done their utmost to destroy market pricing and that is not a counterfactual.

  5. Arthur Says:

    🤔According to data from the Financial Times, six major central banks around the world now hold more than $15 trillion of assets. Of this, more than $9 trillion is government bonds.

  6. GreenAB Says:

    “I WONDER WHAT ENTITIES HAVE BEEN ACCUMULATING SO MANY FRANCS DEFYING THE WILL OF THE SNB.”

    Great question, Yra. If anyone has an answer or a good read on that – I´m all ears. Thanks a lot!

    • Yra Says:

      GreenAB–great to hear from you–keep us abreast of the upcoming elections and I read her comments on backing a eurozone economics and finance minister –really ahead of the elections—what is she doing a Schroeder and hoping to lose the election so as to attain a big job at Gazprom???

      • GreenAB Says:

        Hi Yra,

        Actually there is not much of an election campaign. It´s never been as dull as this year. Really – Germany is doing well. The economy is strong, unemployment is at multi year lows, the Euro crisis is contained (for now), we are running a budget surplus, refugees aren´t coming anymore due to the deal with Erdogan… and so on. The SPD is trying to come up with something, throwing every issue at the wall, hoping that something sticks (like social inequality or less money for defense/more for education) – but so far there´s no momentum at all. It´s hard to reinvent youself, when you have been part of a pretty successful coalition.

        Germans are happy, they love their Angela Merkel, who did a great job steering the country through multiple crisis. The CDU is WAY ahead in the polls (39% vs. 22% for the Social Democrats). The only question is – who will bei Merkel´s coalition partner? And this will be a really close one. In some polls there´s a real chance for CDU-FDP (Liberals). For the past year there´s also been speculation about CDU-Green Party (who are at a similar percentage as the FDP). But the rise of the AfD (even if they fell from their highs) might prevent those options from happen and we´ll see another Grand Coalition (which i would prefer for the good of the country). How about that Kasich-Hickenlooper ticket in 2020? I was excited to read about that. Any chance it´s happening?

        As for Schröder – I guess you read the news, that he´s about to join Rosneft. That didnt fall well with the SPD and the German public. Bad timing from his part.

        Keep watching Macron. His approval numbers are down, because he is shaking things up. But he looks like a strong leader, for France and for Europe. I wouldnt be surprised to see France narrow the gap ecnomically wise to Germany. In addition he´s lobbying for a “core Europe”. So things in the EU could get interesting in the months to come.

        Hope you´re doing well. Best wishes from Germany!

      • yra harris Says:

        Green AB–great post and thanks for keeping us abreast–Macron has a long road ahead as the French unions return from summer vacation.But I think Merkel needs a sizable victory to be able to deliver some of the things that Macron wants for a more federal Europe—the end result is stilla EURO BOND

  7. A.M. Look 8/29/17 | Says:

    […] Spu’s 50X3 Point & Figure…shows a level that can be a Bear Trap. I’ve seen this many times when the P&F seems to want to continue with the direction and reverses first. SPU/BONDS…the last time we traded the 200 DMA was the Spike low on Nov. 9 Election   This is not a place to Puke portfolio’s or establish short positions. I’d buy before I sell at these levels in the Indices to see if we hold. If you haven’t read Yra’s piece last night you should. There are many markets on key pivotal levels. https://yragharris.com/2017/08/28/moon/ […]

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