Some Fascinating Moves in Currency Markets, and Japan Roars on Easy Money Prime Minister « Market Montage

Yesterday was a quite important day from a technical analysis standpoint for U.S. markets which we've been documenting for a few weeks, so I won't spend too much time on that today.  I would like to point out instead the huge moves happening in currency markets.  The euro has been on a major run for many weeks now, and the dollar has been weak – the latter has only accelerated since the Fed's announcement last week.

However the yen is really the story here – for many years the "yen carry trade" was the global "risk on" support.  Essentially you borrow in a low rate currency and invest in a higher rate currency and in theory bank the spread if nothing else.  Well of course at this point almost every major currency is the "low rate currency" as each government and central bank work to debase their currency.  But in anticipation of elections which were held Sunday, in which a Prime Minister (Abe) – who makes Janet Yellen seem conservative in her monetary views – the yen had been in free fall.  This again has accelerated of late.

Abe has essentially demanded the "independent" Bank of Japan to engage in unlimited quantitative easing … to match the Fed.   He also told them he wants to see a switch from a 1% inflation target to 2%.  Plus, despite the massive debt load of the country, he wants to go on a fiscal spending spree.   Now Japan is a major exporter and the "higher yen" the past year has been punishing.  But in the near term at least the market loves this new guy.   The chart does not reflect the 2.4% gain overnight – this is the first move over 10K since April.

Of course not every country on earth can be the weakest currency but each major one (ex China) is trying.  It just seems to be rotational at this point, one country/region debases and then the next tries to out-debase, and we go on and on and on, on this path.  Europe – which is the weakest of these groups economically actually is being punished for being the least loose with its monetary policy and its currency is actually rising relative to the others – as all currency is relative to another.  This seems completely backwards – usually the weakest economies get the weakest currency.  But that is in a vacuum and without the impact of central banks.   If this continues the higher euro is going to pressure the exporting nations of Europe even more – which I guess forces the ECB's hand to strike back at the Fed or BOJ.  But they don't have the same authority or political influence to just go all bazooka.

Certainly we live in amazing times.

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