Swing With The King?

Over at a financial forum...

Enfilade - "The King is weak. Any wisdom forecast on his return?"

Sorry for taking so long to get back, been busier than a proctologist in a room full of assholes.  

The dollar keeps getting dragged down by the JPY/USD carry trade.  Those dollars are being lent into the market for liquidity, higher float, lower dollar. Meanwhile the Yen being borrowed are getting parked on the back leg in JGB, lowering the JPY float, higher Yen.

Simply put, this is a massive carry trade that is outpacing any current "dollar" squeeze which global economic and ED contraction may cause.  The negative spread on the forward swap and the negative yield on the JGB bond indicate the "price" which participants are willing to pay to obtain, much needed "dollar" liquidity in the markets, and which the hoarders are willing to part with those dollars at.

When will it abate? A higher cost of loan funds or interest rate would stop the madness.  Will the BOJ raise? Hell no, their getting paid to hold OPM and a raise would bump the Yen up further. BOJ policy has emasculated their market actions and the carry traders know it.

Proving two things: First, that interest rates reflect the cost of loan funds, not the price of money, which is reflected in FX pairs, spreads and indices. Second, the consequences of said carry trade, a stronger Yen and weaker Dollar, have nothing to do with "safe haven" or the Yen being a strong currency vs any other.

What value or safe haven could there be?  Japan's economic engine has been decimated for two decades and the hollowed out carcass is now in the process of going under. Japan and their banking system are chained to the drowning Panda, who is getting dragged under by the Draghi Queen and the US Zombie economy. Japan is a sinking ship, they know it and can't bail water fast enough.

Again, when does the madness stop? When the dollars run out, or dollar liquidity is satiated, or Japanese interest rates discourage borrowing Yen or spreads discourage the behavior vis in any event, disintermediation of the participants.  Out.  Nattered about at length here, here, here and here.