After a few days of strengthening, the USD was once again trashed after it was revealed that the Fed sent to primary treasury bank dealers, a survey. In this survey, the dealers were asked to estimate the size of the purchases and the impact on the yields, giving their opinions back to the monetary committee. A survey such as this one in not unprecedented but markets, fearful of the Fed's next move, had a near apoplectic reaction. As expected commodities, and especially gold marched higher, the recent mini rally bonds stopped, and the dollar tanked.
Equities, for weeks now, have been on a rally, discounting the day when some of Helicopter Ben's newly minted dollars will work their way back to Wall Street. Today, however, the dollar/equity inverse relationship did not work as equities also worked lower. Is this relationship about to end?
When you examine the results of today's 7 year not auction, you wonder if we really need another injection of liquidity via QEII. The Treasury Department sold $29B 7 year notes at a yield of 1.97%. The bid to cover ratio was 3.06 times amount of the debt sold, better than the bid to cover ratio in the last four sales. Indirect bidders, which include foreign central banks, bought 50.2% of the total sale.
Indeed, a very successful auction, but if there was brisk private sector demand for money, would there really be an abundance of investors willing to invest money at 1.97% for seven years? It is unlikely that pumping additional billions of dollars into the system alone, will encourage private sector business expansion and create jobs.
For months the Japanese yen has been gaining on the USD and other currencies. The dollar weakened from a high of almost 95 back in early May versus the USD, it is now trading at around 81 As time marches on, and the yen yen gains, Finance Minister Noda and other continue to complain about the harm being inflicted on the Japanese economy due to the yen's strength. The Japanese trade surplus is contracting because of the high priced yen, but the market is ignoring Tokyo's complaints.
Today the Bank of Japan downgraded the rate of growth in 2010 to 2.1% and reduced the estimate for fiscal 2011 to 1.8%. Imitating the Fed's actions, the BOJ is commencing their own asset buying program, attempting to stimulate business activity and fight off deflation.
We have speculated that the Japanese Finance Minister might be a touch jealous of Bernanke, and the ease with which his QEII threats have successfully depreciated the USD. Curiously, the BOJ has also moved their next meeting up to the day after the Fed's FOMC Meeting. Could this be the day for the bold dynamic action the Finance Minister has promised?
The Japanese are considering another approach to their strong yen problem as reported by Mayumi Otsuma and Tatsuo Ito in Bloomberg Japanese News today:
The Bank of Japan may want to consider buying foreign currency assets to help ease the yen's appreciation, economic and fiscal policy minister Banri Kaieda said. "Such purchases can be an option for the central bank over the medium to long term," Kaieda said in an interview in Tokyo on Friday. "They would be effective" in curbing the Japanese currency's gains, he said.
Kaieda's remarks come as policymakers struggle to stop the yen's advance and lift the country out of deflation using fiscal and monetary policy steps. The yen appreciated this month to its strongest level against the dollar since 1995, threatening the export-dependent recovery, even after the BOJ loosened credit.
Foreign asset purchases may support demand for the dollar and other currencies and help to weaken the relative strength of the yen, which has gained more than 5 percent since Japan stepped into the currency market for the first time in six years on Sept. 15."
Buying currencies to lesson the yens value did not work but using the high valued yen to buy cheaper foreign assets might prove quite effective over a longer term. What are the chances there will be some intervention at around the 80 handle, in conjunction with some high profile investments overseas, perhaps in the US? Though the chart looks terrible, we do not want to be sell the USD versus the JPY at these levels.
Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.