Post BOJ Blues

Over at a financial forum....

P – "Speaking of things Naybob can explain – "King" Dollar slipping back to 99 a day after Japan goes ZIRP."   Thouest invoke me… According to the latest data released by the US Commodities Futures Trading Commission (CFTC), through Jan 19th, hedge funds and other speculators had $3.9B of bets on a continued appreciation for the yen. As of Jan 20th the Yen hit a one year high vs USD.

From the ECB's meeting in early December through January 20, the yen appreciated 7% on a trade-weighted index. Speculators in the futures market went into the two-day BOJ meeting with their largest net long yen position in four years and the biggest gross long yen position since 2008. And they got cut deep.

Prior to the BOJ going NIRP the yen had already pulled back 2% and surrendered another 2% in response. Those who hedged carry or bet long Yen are now scrambling to cover their margin calls. This usually involves liquidating dollar based assets which raises the dollar float and devalues the dollar.

The other edge of the sword: Each negative 1% JPY/USD move doubles the equity of anyone leveraged 100 to 1 or higher in JPY/USD carry.   That means the 4% Yen devalue was a sixteen fold bump.  With the devalued Yen and lower Japanese loan fund costs, JPY/USD carry has just been made more attractive. TBD.

Said carry causes a rising U.S. dollar, rising U.S. bond prices and deflation in commodity prices. Of course, an unwinding of that carry trade will cause the opposite.  Out.