Strong Yen amid Commodities Rally Spells Trouble

Posted by on Aug 04, 2010 | No comment

Michael Bogan

The remarkable rise in the Yen since early May against the Dollar, Euro and Sterling is reminiscent of the meltdown days of 2009. Since May 3, the Japanese currency has moved higher against the Euro, Sterling and the Dollar by 10%, 5.5% and 10.4%, respectively.

Japan certainly doesn’t benefit from higher spot oil prices, nor does it bask in a robust economy; why, then, is there a sudden strong interest in the Yen?

The sudden interest in the Yen appears to be the result of a stealth unwinding of the carry trades put on by large hedge funds (and money-center banks) to game the spread from higher-yielding U.S. Treasuries. A lot of money poured into U.S. Treasuries and out of their favorite plays during the meltdown, leaving levered hedge funds with no bull game to play—except one—Treasury securities.

Knowing that the Fed would liquefy the financial system by creating an open-door carry trade in U.S. Treasuries for U.S. banks (investment banks and broker-dealers) to play in, everyone got into the act, as selling Yen to buy 10-year Treasuries was a pretty good spread to make easy money in a broken world economy. Now, this money senses the currency risk of the Dollar will wipe out any gains.

Engineering record demand to gobble up record supplies of government paper was job one at the Fed. Any hint of a failed auction could end the Dollar hegemony game overnight. The Dollar/Yen cross served its purpose, but the trade is now going away, fast.

Once looked to as the haven of deep and liquid markets, the Dollar is now trying the patience of world that increasingly has come to admit that the Dollar’s deep and liquid markets are, in fact, quicksand.

The confusion (as some refer to it as “cross-currents”) surrounding the contradiction of a rallying 10-year treasury and rising commodities prices is the result of the Fed’s meddling in the treasury market, not due to huge demand coming in from hot money anticipating deflation.

Those laughing at U.S. Representative Alan Grayson during Humphrey-Hawkins for grilling Bernanke about the approximately $500 billion of currency swaps undertaken with foreign central banks shouldn’t be laughing at all. We don’t really know what the Fed is doing. The succession of successful Treasury auctions in the headwind of preposterous supply is curious, indeed, and could partially explain where the money is coming from to set off a rally in Treasuries amidst the reflation trade back into commodities.

The thesis here is that the carry trade into riskier assets is on, but the carry trade in the Yen to buy Treasuries is off. This contradiction could also explain the timing of the jibber jabber from St. Louis Fed James Bullard’s flip-flop on interest rates (one money manager, Jim Rickards, believes Bullard is playing reverse psychology on traders). Bullard now believes that the Fed should not raise interest rates at all, but embark on a QEII instead.

“The U.S. is closer to a Japanese-style outcome today than at any time in recent history,” Bullard said, warning in a research paper about the possibility of deflation. “A better policy response to a negative shock is to expand the quantitative easing program through the purchase of Treasury securities.”

It’s strange that Bullard could have been so blindsided. Greenspan never saw anything coming, either. And Bernanke? He didn’t see the housing bubble. Rickards could be spot on his theory. No one can say the Fed lacks creativity.

The unwinding of the Yen carry trade into Treasuries could be the very last straw—the last of the seemingly endless last straws.

Contrary to the shameless (maybe unwittingly brainwashed) shills on CNBC, Bloomberg and other propaganda outlets who spout the case of deflation, the Fed’s fear is a failed auction and an “instant karma” event for the U.S. Dollar. The confidence game the Fed is playing is high stakes.

Outrageous U.S. twin deficits, little hope of a recovery in the U.S. economy, and signals from the Fed that it has no plans to pair down its balance sheet anytime soon (Bullock cinched this point) all point to an imminent acceleration in dollar debasement in coming months—maybe, in earnest, after the election. The Fed’s hope is that it can con the markets into believing that it fears deflation.

Will the market buy the con that the United States is threatened with a Japanese-style deflationary spiral? For a while, maybe. But the rapid rise in the Yen coinciding with hot money flowing back into commodities is certainly a canary in the coal mine of another dumping of the Dollar could be underway. Time to place appropriate trades.

About BeaconEquity.com

BeaconEquity.com is committed to producing the highest-quality insight and analysis of small cap stocks, emerging technology stocks, hot penny stocks and helping investors make informed decisions. Our focus is primarily on the underserved OTC stocks market, or “penny stock” market, which has traditionally been shunned by Wall Street. We have particular expertise with renewable energy stocks, biotech stocks, oil stocks, green energy stocks and internet stocks. There are many hot penny stock opportunities present in the OTC market everyday and we seek to exploit these hot stock gains for our members before the average daytrader is aware of them.

Beacon Equity Group Disclaimer

This newsletter is a paid advertisement and is neither an offer nor recommendation to buy or sell any security. We hold no investment licenses and are thus neither licensed nor qualified to provide investment advice. The content in this report or email is not provided to any individual with a view toward their individual circumstances. Beaconequity.com is a wholly-owned subsidiary of BlueWave Advisors.

While all information is believed to be reliable, it is not guaranteed by us to be accurate. Individuals should assume that all information contained in our newsletter is not trustworthy unless verified by their own independent research. Also, because events and circumstances frequently do not occur as expected, there will likely be differences between the any predictions and actual results. Always consult a real licensed investment professional before making any investment decision. Be extremely careful, investing in securities carries a high degree of risk; you may likely lose some or all of the investment.

About BeaconEquity.com

BeaconEquity.com is committed to producing the highest-quality insight and analysis of small-cap stocks, emerging technology stocks, hot penny stocks and helping investors make informed decisions. Our focus is primarily OTC stocks in the stock market today, which have traditionally been shunned by Wall Street. We have particular expertise with renewable energy stocks, biotech stocks, oil stocks, green energy stocks and internet stocks. There are many hot penny stock opportunities present in the OTC market everyday and we seek to exploit these hot stock gains for our members before the average daytrader is aware of them.

Beacon Equity Group Disclaimer

This newsletter is a paid advertisement and is neither an offer nor recommendation to buy or sell any security. We hold no investment licenses and are thus neither licensed nor qualified to provide investment advice. The content in this report or email is not provided to any individual with a view toward their individual circumstances. Beaconequity.com is a wholly-owned subsidiary of BlueWave Advisors.

While all information is believed to be reliable, it is not guaranteed by us to be accurate. Individuals should assume that all information contained in our newsletter is not trustworthy unless verified by their own independent research. Also, because events and circumstances frequently do not occur as expected, there will likely be differences between the any predictions and actual results. Always consult a real licensed investment professional before making any investment decision. Be extremely careful, investing in securities carries a high degree of risk; you may likely lose some or all of the investment.

Copyright Beacon Equity @ 2012