Did some desperate traders spread false market rumours?
According to Japan`s Ministry of Finance the answer seems yes, someone did spread a false rumour today. Market-Outsiders from the Main Stream Media commented on the reaction of weakening in the YEN by 1 big figure+ in the Asian Morning Session as reaction to for this Friday expected Bank of Japan interest policy announcement, which is expected as a fourth interest rate easing which the market has priced in already. This was of course the usual attempt of uninformed market outsiders to comment without knowledge for the sake of commenting. But the real currency traders got a rumour that was spread as usual by messenger as it has always been and will always be - if you are part of the circle. This rumour stated between traders that on Friday the markets would be surprised with an announcement of a 255 Billion USD (which is 27 Trillion YEN) stimulus package in overseas bonds and that this package was also the reason for the heavy rally in the Asian equity markets at market start as in the Nikkei225. Because the rally in equities preceded the 255 Billion USD stimulus package rumour, currency traders believed the rumour and sold enormous amounts of YEN against both USD and EUR, the YEN weakened significantly. Now if you have to ask the question why the YEN weakens if there is a STIMULUS Package issued as DEBT, please go back to your Economics & Finance Textbooks or ask the famous Nun in Game of Thrones to run behind you with that bell shouting "Shame...Shame...Shame". Why? Well because it`s debt dodo. Debt is always bad, the more debt you have the less worth is your currency, duh! Yes, even if the money is used in the corporate sector for firms with notations on the stock market, because that newly issued debt is only used to satify claims of already existing debt for claims that are due - or why do you think that the Japanese Stockmarket was so weak for the last couple of weaks? So when you issue new debt on top of old debt it is always bad in the longterm and really really bad right away from the second you announce it for currency markets. Only after the Ministry denied that there is a plan of issuing 225 Billion USD in new debt "overseas" to international investors, the YEN strengthened again, as this article by Reuters confirms:
Dollar/yen trims gains after MOF denies report of 50-year debt issuance TOKYO, July 27 (Reuters) - The dollar trimmed some of its large gains made against the yen after Japan's finance ministry denied a report that it was mulling the launch of 50-year government bonds. The dollar was up 1.1 percent at 105.83 yen <JPY=> after going as high as 106.54 on reports that Japan was considering issuing 50-year bonds and would announce a 27 trillion yen ($255.08 billion) fiscal package. "It's not true we are considering issuing 50-year bonds," the ministry's department overseeing debt issuance told Reuters on Wednesday. The longest debt maturities Japan currently issues are 40-year bonds.
Looking at the long term picture here it is as of right now looking ok for the YEN, the Japanese did survive the massacre attempt this morning so far well: Japanese Stocks are massively up - whereas other indices like the HSI is rather down - and the YEN is strengthening again. Well, this party can't go on forever: the Japanese equity trader believe in a miracle that the rumour is true and on Friday there is going to be an announcement for 50-year overseas YEN-bonds to be issued for the mind-boggling amount of 255 Billion USD equivalency. The currency trader believe the swift killing of the rumour as soon as it appeared by Japan`s Ministry of Finance this morning.
So by Friday the rumour mill is over. If extra bond stimulus package happens on Friday, its bye-bye equities and the USDJPY will stay unchanged. If there is a bond stimulus package, there will be a short rally in the equities and after that it were to be bye-bye YEN.
Tough choice, but if you ask me I side with the currency traders. The YEN has been strengthening over the last 5 days which I believe is due to the fact that there are no extra surprises on Friday by the BOJ, so I don`t buy into the rumour also.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.