USDJPY has reversed. This shouldn’t have happened. It’s a huge problem.
Now first, Kuroda of the Bank Of Japan prints Yens like crazy; helping to expand the cumulative money supply of “The West” (USA+its colonies Japan and EU).
This SHOULD make the Yen ever cheaper and it did for a number of years. So why is it now getting more expensive?
The reason is the Carry Trade. In which banks and currency traders go short the Yen – because it is in NIRP-land and therefore costs the least to borrow (going short means borrowing it); and with the borrowed Yen they buy debt denominated in another currency – namely they buy US treasuries. Those pay low interest but still, this Carry Trade delivers a (razor-thin) margin.
In a lemming-like frenzy, the total volume of this carry trade – the “SAFE BET” – has expanded to trillions of USD.
And that is the very reason that the Yen now seemingly defies logic and starts to go up. Why? Because the iron law of markets is TANSTAAFL – There Is No Such Thing As A Free Lunch – for every winner there must be a loser. Now when everyone rushes to one side of the boat, by NECESSITY the boat must capsize. And this seems to be happening now.
Demand for Yen – expecting it to become ever cheaper – has overwhelmed supply, therefore the price goes up in spite of it being continuously printed.
This DESTROYS the expected gains of the Carry Traders – because they will have to buy back the Yens that they’ve borrowed, and that will cost them their profits and then some. It is a short squeeze on Yen unfolding.
Meaning a rush to the exits, a massive unwind of the Carry Trade – exacerbating the Yen shortage, pushing its price up more, making the pain worse: A self amplifying catastrophy; and in the process of the unwind, US treasuries – which are the counterweight – will be put on the market, lowering their price – and inversely, pushing up interest rates for US bonds – exacerbating the pain on the OTHER end of the Carry Trade.
The old adage “It’s not Panic when you’re first” comes to mind.
Or “This might hurt a little bit”, as Doctors say.
Expect a bank holiday soon, and maybe, no make that a certainly, ATM’s not working… and maybe check whether your bank is still there. You know, the building. Whether it still is the bank. Especially when the name on it is Deutsche Bank.
You might want to keep a stash of banknotes and/or precious metals etc…
Update APR 23: Panicking -and doubtlessly after frantic cross pacific phone calls-, the BOJ announces more QE, crushing USDJPY by 2%. zerohedge. Let’s see whether that will do anything to stop the squeeze. The central banks of “The West” now churn out currency like crazy as the market fluctuations force them. The end of the bankrupt welfare states -and their debt currencies- approaches quickly now. Do you have trust in your currency? Then ask yourself why. Understand that the money printers are now driven by the news cycle.
Now, as the Carry Traders will just use the BOJ’s Yen printing as a good opportunity to unwind more, the pain will immediately return. The panic is stronger than the printer. When all is said and done, either the Banks are dead or the Yen is in Weimar territory.