A Yen For Liquidity? Or No Yen For Carry?

Following up on LIBOR: Putting Out A Fire With Gasoline? Regarding the Thursday, January 3rd USD/JPY flash crash...

"It took seven minutes for the yen to surge through levels that have held through almost a decade.  In those wild minutes from about 9:30 a.m. Sydney, the yen jumped almost 8 percent against the Australian dollar to its strongest since 2009, and surged 10 percent versus the Turkish lira. The Japanese currency rose at least 1 percent versus all its Group-of-10 peers..."

Once the yen strengthened past 105.50 against the dollar, others were forced to cover their short yen positions, said traders who asked not to be identified as they aren’t permitted to speak publicly. It looks more like a liquidity event with the move happening in the gap between the New York handover to Asia. - Bloomberg

To explain this liquidity event, we are proffered the handover gap between New York and Asia, with Japan on holiday.  Alrighty then, moving West....  A redux of the January 3rd Yen Dollar flash crash occurred Monday, February 11th. This time the carry pair involved the CHF Swiss Franc - USD and another Japanese holiday.

The Swiss franc swooned almost 1 percent at the start of Asian trade Monday as thin liquidity caused by a Japan holiday led to a mini recurrence of the “flash crash” that roiled FX markets early last month.  

Lack of liquidity is a common factor in these events... It’s like a mini flash crash... It’s a combination of low liquidity and Japan on public holiday that’s driven the move.  

These events are likely to owe in part to key changes in the structure of markets more broadly over the past decade; for example, the make-up and behaviour of principals, intermediating agents and trading platforms.  - Bloomberg

To explain this liquidity squeeze which does not involve YEN (wink-wink, nudge-nudge), we are again proffered Japanese holidays, along with key changes in the structure of making markets over the last ten years. Alrighty then, moving West...

The greenback reached a fresh 2019 high on Monday as hopes for U.S.-China trade meetings boosted investor sentiment. The dollar was up against the safe-haven yen, with USD/JPY jumping 0.62% to 110.38. The yen is typically sought by investors as a safe haven during times of economic or market stress. - Reuters

To explain King Dollar's squeeze we are proffered, trade hopes boosting investor sentiment. Further the USD strengthened against the safe haven Yen. Are we not having economic or market stress of late? In fact, the dollar index has rallied 11% since Feb 2018 against a solid backdrop of negative trade war rhetoric. Rolling eyes now...

King Dollars squeeze up while bond yields are declining is easy to explain without false spin. Due to the current liquidity squeeze UST paper is being snatched up, and you can only purchase it with one currency. Guess which one? Every dollar used to purchase that coveted HQLA collateral is taken out of circulation and reduces the float. This puts the screws to anybody short (borrowing) the dollar. Got it?

Speaking of which, let's not mention (because we did long ago) and completely forget about, the $1T in ED (eurodollar) and Euro/USD swap leveraged foreign bank ER (excess reserves) IBDD (interbank demand) deposits sitting in New York branches of foreign banks smoldering, along with King Dollar?  More to come on that in our Putting Out A Fire With Gasoline? series.

At the end of the day, what is common in both flash crash cases?  FX pairs USD/JPY and USD/CHF, both known to be utilized in carry trades, and a closed Japanese market.  Moral of the story?  

Careful trading USD FX carry pairs, especially when involved in currency conversion to obtain USD to purchase UST or otherwise, on days that the markets might not have a YEN for such?  Thus making our title apropos we think.

More to come in Interest Rate Swaps: Putting Out A Fire With Gasoline? Stay tuned, no flippin.

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