Currency Wars Move Front And Center

“What we see here is one of the greatest, least loved, and least recognized primary bull markets in history…. This great gold bull market is something that one sees maybe once or twice in a lifetime.”
- Richard Russell, September 2010

An apparent short squeeze in the Precious Metals have left our CRIMEX Rat Bastids gasping for air as the US Dollar tumbled below it's 200 day moving average yesterday. Soft support was found at 81 on the USDX, giving the Rat Bastids small comfort.

Were it not for a timely intervention in the Yen by Bank of Japan officials last night, the Dollar would very likely be staring at the all important 80 level on the USDX this afternoon given today's grossly Dollar negative economic data.

Understand, for the Bank Of Japan to intervene on the Yen's behalf, they must sell their own currency, and then buy US Dollars. Fat chance that is going to solve anything long term. If anything it should create demand for Gold in Japan as their currency weakens. It is unlikely that the Bank of Japan pursues this intervention for any length of time. Today's action was most likely more about slowing the rise in the Yen, than it is about taking it down. It would appear to be more than a coincidence that the Bank of Japan intervenes in the Yen just as the Dollar is about to fall off a cliff.

Today's timeline of currency intervention in the Yen coupled with the Dollar negative economic numbers out today clearly lead one to believe that the Dollar is destined to move lower soon, and the Precious Metals much higher. However, a pause in the rise of Precious Metals and the fall of the Dollar is warranted here if for any other reason than to just let the dust settle on this Bank of Japan salvo thrown at the Currency Markets. The Currency Wars are now front and center in the Global Economic Crisis. This is the beginning of the end for funny money.

Japan intervenes to weaken yen
By Lindsay Whipp and Alan Beattie
(FT) -- Tokyo intervened in the currency markets for the first time in more than six years to weaken the yen, after the currency broke through Y83 against the U.S. dollar and threatened exporter profits and business sentiment.

The unilateral intervention on Wednesday morning sent the yen down as much as Y1 within an hour and gave the Nikkei 225 and its exporter constituents a boost. However, the action came at a sensitive time that could cloud the debate over China's control over the renminbi.

Yoshihiko Noda, the finance minister, told reporters that the yen's sharp gains from Tuesday -- following Prime Minister Naoto Kan's victory in his Democratic party's leadership battle -- were "a problem that could not be overlooked," given that the Japanese economy has suffered some difficulties, including its ongoing struggles with deflation.

"In order to restrain excessive moves in the currency market, we earlier carried out currency intervention," Mr Noda said. He added that he was prepared to take further action, including further intervention, if necessary and that overseas authorities had been contacted.

Yen intervention remains a political matter over and above an economic one, and the decision for the government to intervene gives Mr. Kan the opportunity to show leadership, according to traders and analysts. A trader said that the lull after Tuesday's DPJ vote gave the authorities a chance to catch the market by surprise.

The action is being interpreted as what is known as a smoothing operation, which is carried out to flatten sudden moves in the currency, rather than to send the currency to a specific point, according to traders. Yoshito Sengoku, chief cabinet secretary, suggested to reporters that the finance ministry saw levels of Y82 as a line of defense for the economy.
http://edition.cnn.com/2010/BUSINESS/09/15/japan.yen.ft/?hpt=T2

Whether this yen intervention is a stink bomb or a smoke screen won't be know for several days, but it seems clear the Yen's unabated rise over the last two weeks has spooked Japan's manufacturing/export base.

Regardless, the Bank of Japan's Yen intervention "saved" the US Dollar today from a flood of bad economic data:

U.S. Import Prices Rose More Than Forecast in August
By Shobhana Chandra
Sept. 15 (Bloomberg) -- Prices of goods imported into the U.S. rose more than forecast in August as crude oil and food costs jumped, masking contained inflation elsewhere.

The 0.6 percent increase in the import-price index followed a revised 0.1 percent rise in July, Labor Department figures showed today in Washington. The August gain was twice the median estimate in a Bloomberg News survey. Prices excluding petroleum rose 0.2 percent, the first increase since May.

Mounting unemployment is restraining consumer spending, discouraging companies from raising prices in the world’s largest economy even as some commodity costs get a boost from demand in developing markets including China. Subdued inflation is one reason economists project the Federal Reserve will keep the benchmark interest rate close to zero until 2011.

“This weakens the case for deflation, and at the same time inflation isn’t a concern,” said Hugh Johnson, chairman of Albany, New York-based Hugh Johnson Advisors, who accurately forecast the gain in import prices. “The Fed doesn’t need to be in a hurry to move.”

Another report showed manufacturing in the New York region expanded at a slower pace than forecast in September, signaling that factory managers remain concerned about a slowdown in U.S. economic growth.
http://www.businessweek.com/news/2010-09-15/u-s-import-prices-rose-more-than-forecast-in-august.html

NY Manufacturing Expansion Slows
By Kathleen Madigan
New York manufacturing activity is expanding this month but at a slower pace than in August, according to the Federal Reserve Bank of New York’s Empire State Manufacturing Survey released Wednesday. Hiring, however, continued to rebound.

The Empire State’s business-conditions index fell to 4.14 in September from 7.10 in August. Economists had expected a reading of 7.0 for September.

While the top-line index weakened, some subindexes improved. The orders index turned positive, rising to 4.33 from -2.71, and shipments improved to a -0.27 reading from -11.50 in August. The index for employment was positive but little changed, standing at 14.93 in September from 14.29. The inventories index, however, fell to 1.49 from 2.86.

The index of prices paid increased to 22.39 from 20.00 last month, while the index of prices received rose to 1.49 from -2.86. Despite the improvement, businesses have little pricing power in an economy that stalled this summer.

Expectations about economic activity in the New York region continued to deteriorate, the report said. The expectations index fell to 31.34 from 35.71 in August. The report said it was the lowest reading since March 2009. The employment index for the next six months slipped to 16.42 from 20.00.
http://blogs.wsj.com/economics/2010/09/15/ny-manufacturing-expansion-slows/

US industrial production slows in August
By Alan Rappeport in New York
US factory output slowed in August, as carmakers pulled back production after a midsummer surge, draining momentum from the manufacturing sector.

Federal Reserve figures showed on Monday that US industrial production rose 0.2 per cent in August after climbing by a revised 0.6 per cent in July. That was in line with economists’ expectations and left production up 6.2 per cent from a year ago.

Following the initial inventory-led boost for the manufacturing sector, which appears to be drawing to a close, a key element going forward will be whether final demand picks up sufficiently to keep the upward impetus in place,” said Joshua Shapiro, chief US economist at MFR.

Manufacturing production was hit by a 5.2 per cent drop in output of cars and car products. Production of consumer goods was off by 0.4 per cent, as factories made fewer appliances and less furniture and carpeting.

In August, output at mines picked up but weaker production of electricity and natural gas slowed utilities.

These production trends reflect the patterns of final demand growth in the overall economy,” said John Ryding and Conrad DeQuadros, at RDQ Economics. “Going forward, we expect continued growth in manufacturing activity although at a slower pace than we have seen over the past year.”

Meanwhile, capacity utilisation, which measures the percentage of plants in use, rose to 74.7 per cent. Although that is 4.7 percentage points higher than August 2009, it remains almost 6 percentage points below the historical average, suggesting substantial resource slack in the economy.
http://www.ft.com/cms/s/0/f43dae22-c0c9-11df-94f9-00144feab49a.html

Rising import prices IS inflationary --- Dollar negative.

Slowing manufacturing --- Dollar negative.

Slowing industrial production and slack capacity utilization --- Dollar negative.

Bank of Japan buys Dollar to weaken Yen, and protects Dollar from blatantly negative economic data points.

Tomorrow we will get the latest on the US Current Account deficit, Initial Jobless Claims, Producer Prices, and the Treasury International Capital [TIC] Report. The effects on the Dollar could be devastating. Maybe the Bank of japan can bail it out again?

Japan May Sell Yen for Second Day in a Row
By Benzinga.com
Japan may intervene in currency markets for the second day in a row, seeking to protect the yen against volatility and a 15-year high against the dollar.

According to a Bloomberg
report:

Japan yesterday unilaterally sold the yen against the dollar for the first time since 2004. Chief Cabinet Secretary Yoshito Sengoku said the finance ministry "seems to think" 82 yen per dollar to be the line of defense, after it reached 82.88 yesterday. Government officials speaking on condition of anonymity have previously said volatility was a bigger concern than the level. Officials said Japan may continue selling the yen in the US and into today's Tokyo trading if needed.

The intervention has sent the yen tumbling more than 3% against the dollar, to 85.63. The CurrencyShares Japanese Yen Trust (FXY) is down 3%, to $115.60.

"The BOJ will provide abundant liquidity to the financial market by utilizing the funds injected by intervention," Bank of Japan board member Tadao Noda said at a press conference in Shimonoseki yesterday.

Prime Minister Naoto Kan is under increasing pressure to stem the yen's recent strength, as slowing exports could potentially wreck any economic growth.

The yen reached a level against the dollar "we couldn't ignore," Kan told reporters in Tokyo yesterday, adding that he will continue to watch the currency closely.

"In the medium-term it can't change the overall direction" of the yen, Tohru Sasaki, head of Japan rates and foreign-exchange research in Tokyo at JPMorgan Chase, told Bloomberg.
http://www.minyanville.com/businessmarkets/articles/yen-japanese-yen-yen-exchange-rate/9/15/2010/id/30105?camp=syndication&medium=portals&from=yahoo

This Yen intervention smells more like a US Dollar rescue than a play to protect Japanese exporters, does it not?

Japan can intervene [re: manipulate] in it's currency, but China can not?

China Currency Policy Prompts U.S. Lawmaker Ire, Disagreement on Remedies
By Mark Drajem
U.S. lawmakers faulted China’s currency policy as predatory as they disagreed on the need for legislation that would punish China for keeping its currency undervalued.

Representative Tim Ryan, an Ohio Democrat and co-sponsor of legislation letting companies seek duties on Chinese imports, said China is violating trade laws and the bill would give the U.S. tools to combat undervalued currencies.

“It’s now time for our country to have the guts to stand up and take a strong stand against China’s currency manipulation,” Ryan said today in testimony to the House Ways and Means Committee. Representative Dave Camp, top Republican on the panel, said he opposes the legislation.

Differences among legislators reflect divisions among businesses and farm groups over trade with China. U.S. manufacturers and labor unions support pressing China on its currency to create jobs, while farmers and lobbyists for companies such as Caterpillar Inc. and Citigroup Inc. argue the actions may hurt business in one the fastest-growing U.S. export markets.

Legislation sponsored by Ryan and Tim Murphy, a Pennsylvania Republican, would let companies petition for higher duties on imports from China to compensate for the effect of a weak currency.

“Frustrations are high, but legislation will not help us get to the goal,” John Frisbie, president of the U.S.-China Business Council that represents companies with operations in China, said in his prepared testimony.
http://finance.yahoo.com/news/China-Currency-Policy-Prompts-bloomberg-594245449.html;_ylt=Ak.E9cZuP0a0jSIjPhcWLlS7YWsA;_ylu=X3oDMTE1Mm5mdmloBHBvcwM4BHNlYwN0b3BTdG9yaWVzBHNsawNjaGluYWN1cnJlbmM-?x=0&sec=topStories&pos=5&asset=&ccode=

Just a side note: The Chinese Yuan hit a 17 year high this morning. Congressional impatience will only hasten the US Dollar's eminent demise.

Gold broke magnificently to the upside yesterday, and Silver moved ever closer to bull market highs. Follow though today was tepid because of the Yen intervention and phony Dollar strength. If Gold can stay above 1262 into the close Friday, odds should be almost 100% that the next leg up in Gold, to $1500, has begun. Silver is entering an overbought condition on it's daily chart. Brave shorts could be the cause for Silver to remain overbought for "much longer than expected" as the bears get their nuts squeezed like lemons at a lemonade stand. Silver needs only to close above its March 5th 2008 mark of $20.64 before achieving a new 30 year closing high.

The recent move in Silver is a major short squeeze as many doubted Silver's resiliency at the $20 price level, particularly in light of the CRIMEX's expanding open interest in this Precious Metal, and chose to sell short in anticipation of the usual CRIMEX take down. Much paper Silver has been sold to "meet demand" and halt the rise in the price of Silver. The "take down" might still come, but don't be surprised if it is from a much higher price.

Silver supply is extremely tight. As of Monday, over 1200 Silver contracts were awaiting delivery notices from the CRIMEX Rat Bastids who sold paper Silver to investors in the futures market that are now asking for delivery. This large number equates to over 6 million ounces of Silver waiting for delivery. A large number of contracts waiting for delivery this far into a delivery month is VERY bullish for Silver...and could portend a major take down going into options expiration at the end of the month as the CRIMX Rat Bastids desperately seek to shake some Silver from the tightfisted investors unwilling to part with their wealth.

A break, and close, in Gold above $1268 tomorrow could prepare us for a move of $20 above the recent high at $1275. A race to $1300 Gold could be just hours away. Monitor tomorrow mornings economic data closely. Any excuse to hit the Precious Metals by the CRIMEX Rat Bastids will be taken advantage of, but it would appear that Silver and Gold are preparing to move higher from here despite the market rigging. Yet we refrain from overconfidence...

Traders, mind your protective stops. If you are already short these explosive markets...God Bless You. Investors, sit tight, and be right. Buy weakness aggressively, or add to your positions, at support.