Japan Turns to Quantitative Easing Once Again!

The Bank of Japan, with instructions from the Japanese Finance Ministry, announced that they would increase their purchases of Japanese government bonds. You know they decided to do this because their multiple implementations of QE, going back 20 years, have all worked so well! NOT!

We all hear the party line that central banks do this to “stimulate growth.” And we know that it “kind of” works… but for only so long. Then you need to do more, right, Big Ben Bernanke?

The yen weakened a bit, but in real life, most of the pricing of additional QE was already in the yen, because I told you it would happen a few days ago. And when I write something, the markets listen. HAHAHAHAHAHAHA! Yeah, right, my grandkids don’t listen to me. I think I should start with them before I take on the markets!

I checked the currencies when I arrived yesterday and then again last night. They seem to be trapped in a very tight trading range the past few days. Not that I have a problem with that, as a reduction of volatility for a few days is fine with me! The euro (EUR) is a tad weaker this morning after S&P downgraded Spain’s debt rating two notches. But again, a day late and a dollar short, as my dad used to say, for these ratings agencies.

The markets are knocking on the Swiss National Bank’s (SNB) door again and asking them if anyone is home. Because if they are, they need to know that the markets are getting ready to take out the floor on the cross to the euro that they set last September at 1.20. I see it trading at 1.2012 right now. So be careful here folks. Going into a weekend is a very good time for a central bank to pull some shenanigans — and don’t forget what I told you a few weeks ago.

The SNB has been making noise that they would like to see the cross to the euro slide to 1.35 or 1.40. That would be a HUGE hit to the franc (CHF) both against the euro and the dollar, as the cross trades are all tied together.

As tradition dictates, when I travel and pass through the St. Louis airport, I grab the latest Economist magazine to read on the plane. I always figure I can look like an egghead while people around me read People and Us and so on. (But in reality, those people don’t care!)

The article was about how lending around the world is coming home. I lot of that came about because of the financial meltdown a few years ago. How ridiculous was that to find out that German banks held U.S. subprime mortgages? But it goes further than that, and the problem with lending coming home is that the emerging markets get left out in the cold. So look for emerging market growth to slow down, folks.

Gold gained almost $13 yesterday as investors are beginning to see what central banks around the world are doing to their own currencies.

“In China overnight, Chinese Premier Wen Jiabao is doing what he can to bring new energy to his campaign to reform the economy by rooting out corruption and moving the nation in the direction of Western-style markets. Wen’s aggressive public statements in support of reform, backed by state-owned media, demonstrate that he and other reformers are in clear control of the Community Party, after the ouster of longtime rival Bo Xilai,” reports The Washington Post.

And then you have our U.S. Treasury Secretary Tim Geithner heading to China once again to encourage the Chinese to continue with their financial reform. But Wen Jiabao beat him to the punch with his comments last night. So why go, Tim? And by the way, how many times have you traveled to China in the past four years? And have they done anything that you’ve asked them to do? No, they smile at you, and when you leave, they go back to what they were doing all along.

And you know, I have this feeling that much like the fact that for years the U.S. armed countries and then later had to fight them, the U.S. keeps pushing China to be more open, and one day they’ll be wishing they had just let China go along on their super-slow pace.

The risk-on trading that we’ve seen the past few days is taking a hit this morning, after the S&P announcement on Spain. Yesterday’s U.S. data didn’t exactly give the risk takers a warm and fuzzy, either. Weekly jobless claims remained high at 387,000, down 1,000 from last week’s revised 388,000.

At least the U.S. economy has Big Ben Bernanke in its corner. Did you hear what Big Ben had to say the other day about the upcoming tax cuts expiration? He was basically telling the president to not push us off the “fiscal cliff.” Let’s listen in: “If no action were to be taken by the fiscal authorities, the size of the fiscal cliff is such that there’s absolutely no chance that the Federal Reserve could or would have any ability to offset that effect on the economy.”

But Ben, how will we pay for those tax breaks? And weren’t you recently on your horse about the exploding debt?

In Sweden this morning, Swedish retail sales beat expectations, with March retail sales printing at a 0.2% increase, versus the forecasts for a 0.3% decline. So a very good outcome there, but will it be enough to satisfy the folks at the Riksbank (Sweden’s central bank)? Recently, the folks at the Riksbank have been sounding a bit dovish, and the markets were of mind that a rate cut was coming. But then this report printed. Tough call there!

The Australian dollar (AUD) is back to $104 this morning. The A$ saw some slippage from the S&P announcement, but for the most part, the A$ is on terra firma this morning, going into the weekend, which is better than where it was last week at this time!

Then from CNBC (not that I watch that channel — you just never know where you’re going to find stories):

“Big jumps in foreclosure activity in cities like Pittsburgh, Indianapolis, New York and Raleigh pushed the national numbers higher in the first three months of this year, according to a new report from RealtyTrac, an online foreclosure sales and data company.

“A majority of U.S. housing markets posted a quarterly increase in foreclosure activity, although the numbers are still down from a year ago.

“‘First-quarter metro foreclosure trends were a mixed bag,’ said Brandon Moore, chief executive officer of RealtyTrac, adding that the increase in the number of cities seeing a quarterly jump is ‘an early sign that long-dormant foreclosures are coming out of hibernation in many local markets.’”

The favorite thing that my two grandsons, Everett and Braden, like say is “Uh-oh.” And that is applicable here, eh?

To recap: Japan has gone back to the QE table, because it has worked so well for them for the past 20 years! NOT! S&P downgraded Spain’s debt rating two notches, and that news has turned the risk-on trading that we’ve seen for the past few days around. But still, we’re trading in very tight ranges, which is OK with Chuck — for now, at least!

About Chuck Butler 105 Articles

Affiliation: EverBank

Chuck Butler is President of EverBank® World Markets and the author of the popular Daily Pfennig newsletter.

With a career in investment services and currencies extending over 35 years, Mr. Butler oversees all aspects of customer service and the trading desk for EverBank World Markets. A respected analyst of the currency market, Mr. Butler has frequently made appearances or been quoted by the national media. These include the Wall Street Journal, US News, World Report, MarketWatch, USAToday, CNNfn, Bloomberg TV, CNBC, and the Chicago Tribune.

Mr. Butler was previously the Chief International Bond Trader and Director of Risk Management for Mark Twain Bank, and has held significant positions in the investment industry since 1973.

Visit: EverBank

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