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Currency Traders War With The Bank Of Japan, Causing The Euro Yen Carry Trade And Stocks To Trade Lower

Financial News For September 30, 2010

Stocks, ACWI, fell lower as the “euro yen carry trade” hit resistance, as the currency traders took the Yen, FXY, above 118.5 early in the day.

Currency traders experienced trepidation in taking the Yen above 118.5. This turned the EUR/JPY down, sending stocks lower. The Yahoo Finance chart of the Euro combined with the Yen, reveals that the currency traders withdrew from taking the Euro, FXE, higher at 11:00 AM.

The Yen, FXY, gaped opened higher at 118.8, and fell to 118.35. But after rising again to 118.65, the Yen fell lower to 118.30 on concern that the Japanese Prime Minister Kan, and the Bank of Japan, might intervene at the 118.5 level.  The Yen, FXY, closed up 0.22% at 118.57.

The EUR/JPY fell from its previous close of 114.05 to trade lower around 113.7. In the currency war, between the currency traders and the BoJ, fear of intervention, turned off  “the euro yen carry trade spigot of investment liquidity”, resulting in stocks falling lower.

The Euro, FXE, closed up 0.01% at 135.81, unable to close above 136.0. The Euro had closed  April 14, 2010, at 136.22. And fell from 133.30 on April 26, 2010, when the currency traders sold the major currencies and the Euro off against the Yen, with the onset of the European Sovereign Debt Crisis.   

The Yahoo Finance chart of the Yen, FXY, shows its gap open higher to 118.8, and subsequent trading throughout the day.

The higher Yen, FXY, caused the JYN ETF to rise as well. As the US Dollar recovers, when the Euro, FXE, sells off, then JYN will fall lower.

The US Dollar, $USD, closed up 0.05% at 78.73.

The major currencies, DBV, fell to 23.24 below its September 21, 2010 value of 23.26.

The emerging currencies, CEW, rose to 22.92, continuing a long rally.

The ratio of DBV to CEW, DBV:CEW, fell.

Emerging market financial titans, EFN, rose 1.4%. Emerging markets Financials Index, EMFN, rose 0.2%. Emerging Market Bonds, EMB, rose 0.3%. Emerging markets small cap dividends, DGS, rose 0.6%. India, INP, rose 0.6%. Tata Motors, TTM, fell 0.1%. Peru, EPU, rose 1.1%. Thailand, THD, rose 0.7%. Emerging markets, EEM, rose 0.6%.

The ratio of EUFN to EFN, EUFN:EMFN, manifested bearish engulfing, communicating that when stocks do fall the major country financial shares will fall faster than thei emerging counterparts.

The gap open higher in the Euro, FXE, caused oil, traded by the 200% ProShares ETF, UCO, to pop higher.

In summary, the September 15, 2010, “Yentervention” by the BoJ, effected “competitive currency deflation”, that is, “competitive currency devaluation” today, September 30, 2010.  Debt deflation came to world stocks, ACWI.  This  being confirmed by the ratio of the pure small cap value shares, RZV, relative to the pure small cap growth shares, RZG, manifesting a dark cloud covering harami as seen in RZV:RZG.

Chart of world stocks, ACWI, shows a bearish harami and close 0.2% lower at 43.21.

Chart of RZV:RZG

Chart of RZV:RZG Weekly

Competitive currency deflation, specifically the intervention by the Bank of Japan, has raised volatility,VXX, and caused inverse volatility, XXV, to fall.  A battle between the bulls and the bears got underway today September 30, 2010, that is before Thursday, September 7, 2010, when earnings reporting season begins. This struggle is communicated very well in the lollipop hanging man candlestick in the chart of Tax Managed Buy Write Opportunities Fund, ETW:

The possibility of “the end” of the “pre-earnings report bull market” is seen in the bearish engulfing candlestick in the chart of the Proshares 200% ETF, RETL.

The possibility of the end of the “pre-earnings report bull market” is also seen in the chart of Exxon Mobil, XOM.

A bear struck CF Industries, CF, today.

it is significant to note that on a day when stocks traded lower, bonds, BND, traded lower as well; they traded down to 82.66 matching the recent high of August 31, 2010 at 82.66.

Yes, debt deflation came to bonds today. And the question arises, will the medium term US Treasuries, IEF, continue to rise, the closer the FOMC November 3, 2010, meeting approaches, bearing the possibility of a surprise QE 2, with the Fed announcing purchase of US Treasuries.

Short term US Treasuries, SHY rose; but IEF, fell, and the longer out TLT, fell and the Zeroes, ZROZ, fell even more reflecting that peak steepening has come to US Government Debtt. The 30:10 yield curve flattened; and it will see ongoing flattening, continually tearing away the wealth of those invested in the longer out US Treasuries.

Chart of bonds, BND

Chart of IEF. Business Insider reports with chart: “According to SocGen Cross Asset Research, hedge funds as a group have recently become net-buyers of 10-year U.S. Treasury's. There is a reason why they have switched from short to long: they believe their position will be worth more come November 3, 2010, thanks to Uncle Ben, “doing em good” with “dee money good”.

The daily chart of the US Government 30-10 Yield curve, $TYX:$TNX, communicates a peak has been or is being achieved in steepening US Sovereign Debt; this means that debt deflation has come or is coming to longer out bonds of all types, including the greater maturity corporate debt such as BLV.  Chart of $TYX:$TNX.

Chart of BLV

Many investors seeing a surprise QE purchase of US Treasuries, have piled in short term US Government debt traded by SHY.


The gap open higher in the Euro, FXE, caused the Junk Bonds, JNK, to trade higher.

A bearish harami in the Australian Dollar, FXA, caused a sell off in Auatralian, EWA shares.

The Euro, FXE, closed at 135.81

The European Shares, VGK, manifested bearish engulfing; they may or may not turn lower. Bloomberg Business Report relates The Markit iTraxx Europe index of 125 companies with investment-grade ratings rose 2 basis points to 112.75, Markit prices show in article Corporate Bond Risk Rises in Europe, Credit-Default Swaps Show

The S&P, SPY, manifested bearish harami; it may or may not turn lower.

Personally, I believe, that a bear market has commenced as the European Financials, EUFN, manifested bearish engulfing and closed below support of 22.50 at 22.22; and as the Banks, KBE, closed below both support of 23, and their 20 day moving average of 23.15 at 22.95.

News Of The Day

I ... To be balanced, I share the Bespoke Investment Group Seeking Alpha report Estimated Q3 Sector Report: “As shown, the S&P 500 as a whole is expected to see Q3 EPS growth of 23.6% versus 2009. The Financial sector, as beaten down as it is, is expected to see the biggest Q3 '10 growth at 48%. Industrials, Technology, Energy, and Materials are the other four sectors expected to outgrow the S&P 500”. I have to ask, is it wise to be short Industrials, Technology, Energy, or  Banks, KBE, given those kind of projected earnings? Well, perhaps, one might go short inverse volatility, XXV.   

II ... EuroIntelligence in article Finally, The Irish Are Forcing The Banks Bondholders To Take Losses reports: “The Irish Finance Brian Lenihan will today outline a recapitalisation of Anglo-Irish Bank as part of which the subordinated bondholders will participated in the restructuring – meaning that they forcibly converted to equity holders, a polite way of saying: wiped out. In an interview with the FT, Brian Lenihan said that the failure of Anglo Irish bank, the lender at the centre of the country’s financial crisis, would “bring down” Ireland. He said “Ireland had no choice but to act ... Any Anglo failure would bring down the sovereign. It is systemically important ... because of its size relative to the national balance sheet. No country could contemplate the failure of such an institution.” In today’s statement, Lenihan will make that ordinary bond holders have nothing to fear, but the situation of the subordinate debt holders would be addressed in the statement. In anticipation of that statement, S&P downgrade Anglo-Irish Bank’s subordinate debt by three notches. There are also talks going on that the Irish government takes a majority ownership in the Allied Irish, according to Bloomberg.  One option is to convert partly its €3.5bn preferred shares into ordinary shares.  Currently, the state has a 18.7% share in the bank. The FT writes that Lenihan is expected to announce a further taxpayer injection into Allied Irish of about €2-3bn to help the bank meet the regulator’s year-end deadline to raise €7.4bn.”

Chart of Ireland, EIRL

III ... Paul Krugman gets really depressed about central banks which advocate exit strategies.

IV ... Bloomberg reports: The Yuan Weakens For First Time  In 13 Days On Threat Of US Trade Sanctions.

V ... The alarmist and ever dramatic Tyler Durden in article Are The 250,000 Foreclosure Sales From Q2 About To Be Reversed, As Fitch Prepares To Downgraded Companies, relates: “RealtyTrac has released its Q2 summary snapshot. In summary, Q2 saw 248,534 properties in some stage of foreclosure (default, scheduled for auction or bank-owned) sold to third parties. This represented a 5% increased from Q1, and a 20% decline from Q2 of 2009. The average sales price of a foreclosure property was 26% below the average sales prices of regularly sold homes. “While foreclosure sales increased in the second quarter, non-foreclosure sales increased even more, spurred on by the homebuyer tax credit that expired during the quarter,” said James J. Saccacio, chief executive officer of RealtyTrac. “That had the net effect of lowering foreclosure sales as a percentage of total sales during the quarter, but that may be a temporary dip as the removal of the tax credit could drive more buyers back to discounted short sales and REOs.” Ah, but herein lies the rub: with pretty much everyone now halting evictions, and foreclosure themselves, all those who are looking for foreclosure bargains will be very, very disappointed. Because while the actual market is digesting the implications of what the recently announced JPMorgan moratorium on foreclosures means (very bad things), Fitch has already fired the first shot and announced it would downgrade mortgage companies ... And the most troubling implication: all those who bought foreclosed properties may soon be facing a transaction unwind, once it becomes clear that there isn't a clear title owner.”

VI ... The Associated Press reports Moodys Downgraded Spain’s Debt Rating From AAA to Aa1. “Spain's economy will likely expand about 1 percent annually in coming years, lagging behind growth rates for nations like Britain, France and Germany, she said. The country also faces key challenges in trying to boost low productivity and international competitiveness, Moody's said. The other two major rating agencies, Standard & Poor's and Fitch, downgraded Spanish debt in late April and late May respectively. Moody's also said Spain faces worsening debt affordability, or interest payments as a share of revenues, and significant borrowing requirements -- making it vulnerable to market volatility. Alejandro Varela, an analyst at Renta4 brokerage fund managers in Madrid, said investors were expecting the decision and that it will add pressure on the government to retool Spain's economy.”

Chart of Spain, EWP, manifested bearish harami. I ask can European shares, VGK, turn higher now that Spain Sovereign debt has been downgraded? Well, I guess anything is possible.

VII ... Jeannie Aversa of the Associated Press in article Economy Loses Speed In Spring; More Weakness Ahead reports: “The nation's economic growth tailed off sharply in the spring and probably isn't faring any better now. Gross Domestic Product, GDP, the broadest measure of the economy's health, expanded at a feeble 1.7 percent annual rate in the April-June quarter, The Commerce Department reported Thursday. That's a notch higher than the 1.6 percent growth rate the government estimated a month ago. The slight change was mostly due to a little more spending by consumers than first estimated. Still, that's not enough to have a major impact on the economy. The second quarter estimate is a sharp slowdown from a 3.7 percent growth rate logged in the first quarter. Most economists expect growth to be similarly weak in the July-September quarter, with estimates ranging between 1.5 percent and 2 percent. The government's first report on third quarter GDP will be released Oct. 29. Unemployment — now at 9.6 percent — is expected to stay high or even rise in the coming months. Americans aren't spending enough to give companies the kind of confidence in the economy that leads to rapid hiring.”

VIII ... The Federal Reserve Chairman and other top US Financial Regulators met in summit to begin development of the new financial, banking and credit Regulatory Framework authorized by the Dodd-Frank legislation.

Marcy Gordon, of the Associated Press, writes in article Bernanke, Others Working Together On Overhaul: “Federal Reserve Chairman Ben Bernanke and other top regulators said Thursday their agencies are working vigorously to put into effect the sweeping overhaul of U.S. financial rules and are closely coordinating with each other.

Bernanke said the Federal Reserve is working with the Treasury Department to develop ways for regulators to best detect financial dangers that could damage the economy. "It is essential that the (overhaul law) be carried out expeditiously and effectively," Bernanke testified at a hearing of the Senate Banking Committee.

Deputy Treasury Secretary Neal Wolin said, "We are moving as quickly and as carefully as we can."

The regulators said they will collaborate in the Financial Stability Oversight Council, a powerful assembly created by the new law and headed by Treasury Secretary Timothy Geithner. The council, which has its first meeting on Friday, is charged with keeping watch over the entire financial system.

At the same time, Bernanke, Federal Deposit Insurance Corp. Chairman Sheila Bair and other regulators affirmed the importance of their independence and the value of having divergent views within the council. Unlike the Treasury Department, which is part of the Obama administration, the others are independent regulatory agencies.

"Coordination's going to be extremely important," Bernanke said. But he also said that independence "is very important for a lot of good reasons," such as providing "multiple sets of eyes."

Bair said "there will be differences." Mary Schapiro, chairman of the Securities and Exchange Commission, said the regulators already have had "lots of rigorous debate behind the scenes" on several issues.

The new law, enacted in July ... is aimed at preventing another financial crisis like the one that struck with force two years ago and plunged the country into a deep recession.

The agencies are charged with writing scores of new rules to put meat on the bones of the overhaul law. As sweeping as the law is, Congress left much of the substance of the new rules to the discretion of regulators. The rule writing, just under way, already has drawn intense lobbying from financial industry interests.

Bernanke also said the Fed is helping Treasury identify companies that are so big and so interconnected that their failure could take down the entire financial system. Those companies -- which are likely to include Wall Street firms, big hedge funds and insurance companies -- would be subject to tougher regulations.”

IX ... AFP/Breitbard reports Brazil Warns Of World Currency War: ”The world is in the grip of a currency "war", with leading nations using devaluation to solve economic problems, Brazilian Finance Minister Guido Mantega has warned in remarks reported from Sao Paulo. "We're in the midst of an international currency war, a general weakening of currency," he said in remarks reported by the Financial Times newspaper. "This threatens us because it takes away our competitiveness." Japan, South Korea and Taiwan have intervened recently to pull down the value of their currencies, the newspaper noted, and the dollar has fallen by about 25 percent so far this year against the Brazilian real. Such a fall increases the price of Brazilian exports on the US market. The remarks are set against a background of increasing tension notably between the United States and China over the value of the yuan.”

Brazil, EWZ, shares traded parabolically up 2.1% today; as the Brazilian Real, BZF, soared parabolically. The Proshares 200% of Brazil ETF, UBR, rose 2.1%

Personally I am invested in gold bullion, $GOLD, it was a decision made long ago.
Today, the world moved into a new financial matrix. The currency traders, the central banks, and the United States having established the Dodd Frank Regulatory Framework governing investments, banks and credit, have “scorched the investment skies” ... “welcome to the investment desert of the real” ... “we ain’t in Kansas no more”.
Theyenguy says: “In a competitive currency deflationary environment” with a competitive currency race to the bottom, those having personal possession of gold, will have an investment worth something.”  

X ... EuroIntelligence reports Martin Wolf’s FT analysis of global capital flows stating that current global capital flows will lead to a devaluation of emerging market currencies:  “His theme is the global exchange rate wars. He says deficient demand in the industrialised countries leads to a beggar-thy-neighbour devaluation, which would necessitate an increase in current account surplus in emerging markets. But this is not happening. The latest IIF data suggest net private capital inflows into the emerging countries of a little under $185bn. Yet with a current account surplus of $320bn, and few official net inflows, the external balance would imply an external surplus of $535bn. As net capital flows must by definition balance the current account, the adjustment must come via the exchange rate.”  

However, I provide the chart of emerging market currencies, CEW and the chart of developed market currencies, DBV. The Chart of DBV:CEW communicates to me that the developed currencies are going to fall rapidly lower from the price of the emerging market currencies.

XI ... The European Central Bank’s EU Banking Sector Stability Report for September 2010 released September 29, 2010, relates funding challenges for a number of banks: “Conditions in both short and long-term funding markets were still far from normal in August 2010, and funding challenges for some banks remained substantial. Looking ahead, one area of concern is the risk of bank bond issuance being crowded out as a result of the significant increase in financing needs of several EU governments in the period ahead. In addition, banks may also face the prospect of higher funding costs owing to the need to term out their funding and because of increasing competitive pressures in markets for retail deposits. Moreover, the continued reliance of some banks on central bank refinancing facilities remains a source of concern.” This report turned European Financials, EUFN, 0.87% lower; which in turn, induced Banks, KBE, 0.48% lower.  

Today, September 30,, 2010, the market correlates inversely with the US Dollar, $USD, and together with the Euro, FXE. Regional news such as this may cause the currency traders to sell the EUR/JPY from 113.7, seen in FXE:FXY, which would turn the S&P, SPY, and world stock market, ACWI, lower, before earning reports come forth the first Thursday, in October 2010.

The US Dollar, $USD, is terrifically oversold; its rise would devastate world shares and the S&P.

Said another way the current stock market has been funded by US Federal Reserve POMO and Plunge Protection Team, PPT, operations, and by euro yen carry trade investing, and other yen carry trade investing. Tyler Durden relates in Federal Reserve Balance Sheet Update: Week Of September 29:  “Fed excess reserves were at $981 billion, a decline from $1.01 trillion at the beginning of the month, but most notably, in the past month this number hit a year low of $932 billion on September 15. One wonders just what securities the banks were buying up with these reserves? Keep in mind the stock market closed essentially at the level it hit on September 20, making one wonder just how much of a factor the nearly $80 billion decline in bank excess reserves in the first two weeks of the month may have been.” If all of this stimulus, is removed, then stocks will fall.

XII ... I provide the ChartList report Stock And ETFs Are At Transitional Point for your analysis.

Disclosure: I am invested in gold bullion