Thursday, March 17, 2011

Is The Yen Intervention Just Another Global Financial Band-Aid, Or The Launching Pad For A Global Hyperinflation?

What is it about St Patrick's Day and global financial shenanigans?  Is "shenanigans" Irish?  March 17, 2008, Bear Stearns blows up, and the US Fed rides to the rescue of the global financial community along with the ever nefarious JP Morgan.  The world commodity markets tank, and the Silver and Gold markets take a ride down the elevator shaft.

Today, March 17, 2011, and in the wake of Japan's National Disaster Trifecta of an earthquake, tsunami, and nuclear meltdown, the U.S., Germany, France, Canada, Italy, the U.K. and Japan decide it would be a great idea to jointly sell the Japanese Yen to once again keep the world financial system from unraveling.  Heaven forbid Japan have a strong currency when facing overwhelming reconstruction costs.  Better to beat down their local currency, so that the materials they will need to import to repair the nation cost more. 

Brilliant!  What could be more inflationary? 

I know, I know!  How about a $700 BILLION cash infusion?  As if $700 BILLION in cash with untold BILLIONS to follow in Bank Of Japan QE wouldn't weigh on the Yen enough, they have to invite all of the other failing Western financial systems to a beat down the Yen party.

Now that the uncertainty of a Yen intervention has passed, it would not surprise me to see Silver and Gold now head straight for the Moon.  Overbought bullish sentiment be damned!  If there wasn't any Inflation before this Japanese catastrophe, the certainly is going to be a tsunami of it now!

We'll have to see how this plays out overnight, but the knee jerk reaction in Silver and Gold since the intervention began at 9:34AM Tokyo time is to the upside.  Gold and Silver sat virtually still all day awaiting news of this Yen intervention.  The news has arrived...

G-7 Sells Yen in Its First Joint Intervention Since 2000
March 17, 2011, 8:48 PM EDT
By Toru Fujioka and Mayumi Otsuma
March 18 (Bloomberg) -- The Group of Seven will jointly intervene in the foreign exchange market for the first time in more than a decade after Japan’s currency soared, threatening its recovery from the March 11 earthquake.

Japan began the effort, sending the currency down 3.1 percent against the dollar at 9:34 a.m. in Tokyo. Each of the G-7 members will sell yen as their markets open, Japan’s Finance Minister Yoshihiko Noda told reporters in Tokyo today. The G-7 said in a joint statement after a conference call of its finance ministers and central bank chiefs that it will “provide any needed cooperation” with Japan.

Japan’s central bank also said in a statement that it will pursue “powerful monetary easing” as policy makers sought to reduce the threat the world’s third-largest economy sinks into a recession. The Nikkei 225 Stock Average gained after the announcements, paring losses to 12 percent since the quake and ensuing tsunami killed thousands and led to rolling blackouts and radiation leaks at a nuclear plant.

“It will be supportive for the economy if they can manage to stabilize the yen,” said Thomas Harr, Singapore- based head of Asian foreign-exchange strategy at Standard Chartered Plc. “You will have better chance of succeeding when you have the joint intervention rather than just Bank of Japan.”

Conventional wisdom would have it then that a Yen intervention would be bullish for the US Dollar, and negative for Precious Metals and Commodities...but will it?

Yen intervention friendly towards the Yen carry trade
Dan Norcini, commentary
One of the reasons that leveraged carry trade positions explode is a rally in the underlying currency which has financed the trade. In this case, it is the Japanese Yen which has been the funding currency. Those who put on this sort of trade are effectively short the Yen because when they exit the trade, they have to close out the positions that they financed and then buy Yen to pay back the original loan in Yen terms. As the funding currency rallies, they begin losing money because they are forced to pay a higher price for the Yen when they do the foreign currency exchange.

When we saw the Yen begin rallying sharply this past week it set off a cascade of unwinding of the carry trade as hedge funds dumped both stocks and commodities that had been purchased and then leveraged up as risk trades were quickly going underwater.

It now appears that the Bank of Japan has secured the cooperation of the entire G7 in knocking down the Yen which most agree had soared to levels that were nowhere near commensurate with an accurate valuation of the currency given the fiscal condition of the nation.

If it now appears that the G7 agrees to keep the Yen at bay then it could well be that the same hedge funds that were blowing out of their carry trades will be eager to reinstate them since they will feel that they have an effective upside cap on the Yen thus eliminating an element of risk in the trade.

If the nuclear plant situation in Japan can indeed get stabilized, that, combined with the cap on the Yen, could be the signal for the hedgies to pile back into the carry trade. It would not surprise me to learn that the BOJ would actually welcome such an event because it would keep a lid on the Yen and would thus serve their purposes of preventing the Yen from strengthening.

I would therefore view this as setting in place the factors necessary for keeping gold and silver well supported in price again. We will see how the market is interpreting these events in the trading that takes place over the next few trading sessions.

Mind you, it is the unwinding of the Yen carry trade that has pressured commodities and the Precious Metals this week. should be noted that the Precious Metals were looking tired prior to the earthquake in Japan.  The ensuing uncertainty surrounding the catastrophe has helped take a bit of the boil off the Precious Metals and emboldened the shorts.  Any rush back into the long side of these markets could result in a major short squeeze.  This looks particularly possible in the Gold Arena:

This Silver chart looks similar to Gold's this evening as it too is running higher as the uncertainty of Yen intervention has been lifted.  If Dan Norcini's commentary above proves accurate, a lot of Silver positions that were unwound this week because of the Yen carry trade imploding may be about to be reinstated.

A comment by Harry Organ in his Daily Gold & Silver Report caught my attention:

The front March delivery month saw its OI fall only by 25 contracts to 1054 from 1079 despite 57 deliveries yesterday.  The next front month of May saw its OI fall from 79,026 to 77,188.  It is a little strange that so many are rolling early into the July contracts.

An experienced options trader commented to me this afternoon:  "Get out of Silver."   When I replied that I had just closed a short position he said, "Bah!  The spread is where to make big money right now.  Sell near and buy far."  For what it's worth...  I remain wary.  The CRIMEX goons are in a world of hurt going this far into a delivery month with over 1000 contracts remaining to be filled.  The term "shenanigans" could yet be redefined by this front months end.

Noda may want to keep the capital flowing
By Robert Fullem
However, a recently published WSJ article about the nuclear liability has the government picking up the tab for most of the damage citing a Japanese liability law about natural disasters.

A government "bailout" seems to be a reasonable assumption given the circumstances though private reinsurers in the UK, Europe, and US will certainly cover some of the costs. Given the high policy premiums, it is reasonable to assume that the currency position of the policy is already hedged. If they are not, the net FX impact of premium payments should be easily absorbed.

On repatriation, the assumption is that both retail and institutional accounts will sell overseas assets to pay for emergency needs and reconstruction efforts. To the contrary, there was little evidence of this after the Kobe quake in 1995 and there is little evidence of it to date.

A more likely scenario has the government stepping in with a large supplementary budget and the BoJ absorbing it thus enhancing liquidity.

To this end, the BoJ has already pumped in JPY31trn in an effort to keep rates low. Liquidity is the BOJ's primary concern at the moment as it does not want to a repeat 1995 or have electricity outages impact trading volumes or ATM withdrawals. A few JPY here or there in a speculative FX markets will not make a difference.

Further down the road, it is the JPY's impact on inflation that will be the BOJ's primary concern, particularly as food prices move higher. If anything, the tragedy may have appropriately forced BOJ's Shirakawa, a cautious spender, into a looser monetary policy ensuring Japanese reflation.

In other words, the Bank Of Japan will follow Bumbling Ben Bernanke down the QE wormhole that leads to hyperinflation.  [After all, the Japanese invented QE.]  With the number one [US] and number three [Japan] global economies both running their printing presses overtime, and willfully devaluing their respective currencies, the road to hyperinflation may now be paved curb to curb.  All this to save the Yen carry trade.  The Yen carry trade is the grease that spins the wheels of global high finance.  This evenings yen intervention is ALL ABOUT saving the Yen Carry Trade.  Commodities and Precious Metals traders may well soon begin to rejoice...time will tell.

The knee jerk reaction to this evening's Yen intervention announcement is a rise in the Precious Metals and Commodities.  I'd like to see them get some legs and breakout of these Flags before I jump on the "The Yen Carry Trade Is Saved" band wagon.  Things must be pretty precarious here in the financial markets for the G7 to sanction this coordinated action in the currency markets.  The reactions here in the Precious Metals and Commodities, and going forward, may not end up being as dramatic and severe as they were following the banking shenanigans on March, 17 2008, but a correction in the price of Silver is still warranted "technically".  Whether or not it comes here, or from a higher should be expected, not "unexpected".

This is not 2008
Dan Norcini, commentary
"The difference between what happened to commodities and other assets in 2008 was that the Fed was not engaging in any form of QE at the inception of the crisis. It could well be that we now have QE3 set in stone."

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