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The biggest loser from recent US monetary policy has been the Nikkei, which has seen a 6.2% top to bottom move since the FOMC announcement through the US/JP rate spreads driving USD/JPY and hence, the Nikkei. This, of course, is being exacerbated by the yen being the new default counter currency as we are so keen to sell everything else (see below chart: USDJPY - white, Nikkei - orange, 2yr US/Japan yield spread - yellow, 10yr US/Japan yield spread - green).

(Click to enlarge)

So we are back to a good old fashioned FX theme of trying to guess if the BoJ will try and do something about it and how. If they come in and buy cart loads of USDs there is no way they then want to park them back in Treasuries, as it is the US/JP yield spread compression that is the original cause of the problems.

In fact, probably the best way for them to intervene is to sell their holdings of Treasuries and bring it back down the curve and hold it as cash and hope it starts spreads widening again. Does that mean that Joe Public is paying back his maturing mortgages to Japan via the Fed taking the cash off their MBS maturities and using it to buy their Treasuries back from Japan? But what happens to the cash? The Japanese put it on deposit where it finds its way back onto to bank balance sheets and they use it to buy Treasuries again. Hmmmm.

Perhaps they should take the USDs in cash, actual paper notes, and burn them, effectively destroying the problem of too many USDs. So they can effectively print their own money and get the double whammy of QE'ing themselves, while deQE'ing the US. The extreme sport version of competitive of devaluations, where you actually try and destroy someone else's currency faster than they can print it.

If this took off seriously it would make Mugabe mighty bid as Finance Minister. So much for Austrian Economics, how about following the Zimbabwe school? Is there any value in burning money? Team Macro Man once worked out the price of oil needed to make it cheaper to burn dollar bills instead in terms of cost per Kj output. From what we can remember, it came out at about $360,000 per barrel. Some way off yet, but if Voldemort is going to join in and burn his USD reserves that’s about 7,000,000 barrels of oils worth.

Though that may sound absolutely ridiculous it appears the money multiplier has gone into parabolic hyperspace where nothing is impossible.

We are afraid that this is all still heading towards more and more blatant FX manipulation which just increases the chances of trade sanctions and tariffs. The gloves may not yet be off but their laces are undone, so for now the market is back in prodding mode and will keep it up on JPY until they get something more substantive than today's BoJ mumble which came straight out of their ancient book of obfuscation.

The general panic mood of yesterday seems to have faded and as the dust clears we see a new landscape revealed with the euro center stage and previously neglected euro-negatives being pulled out of the draw and dusted off. But this is not feeling like a general panic and is sectoral now rather than general. In fact, we are only back to levels we were at a month ago in most things and "most things" charts all look the same these days.

So we look at this, so far , being a positional and reality rebalancing back to middle of summer range rather than the start of the "next big thing". And though a complete guess, it wouldn't surprise us if the next big thing involved a PIIS poor bank catalyst. The "G" has gone already, and so we hereby copyright the use of the term "PIIS" and all such headlines derived therefrom, such as "PIIS poor" etc.

Disclosure: No positions

Source: JPY / USD: Extreme Sport FX-Devaluation