by Dave Kranzler, Investment Research Dynamics:
It’s been well documented that the $/yen has been the “lever” by which the Federal Reserve and the U.S. Treasury ( via its Working Group on Financial Markets) has been manipulating the stock market higher and keeping a cap on the price of gold. Craig Hemke of TFMetalsReport.com has done a brilliant job documenting and commenting on this dynamic: It’s All About The Yen. I would recommend looking at his archives to see the historical context of his work.
The yen has been depreciating vs the dollar at a rapid rate since October 2012. NotUntitled coincidentally the SPX embarked on a nearly uninterrupted upward move that took it from 1099 in early October to its all time high of 2130 in May 2015.
Starting in early August, however, the $/yen began to break down technically, as the yen began to appreciate vs. the dollar – primarily in big “waterfall” chunks. Not coincidentally, the SPX began to “tip over” at about the same time. Yesterday the $/yen plunged briefly below the key 110 level, closing at 109.78.
Today (Wed, April 7th) the dollar crashed another 1.4% the yen. For clarification, a 1% move in a currency is considered to be a huge move. As you can see from the 1yr $/yen graph to the left, the $USD has depreciated in value quite rapidly vs. the yen. There has not been any event-specific news that would be causing the rapid depreciation of the dollar vs. the yen. In fact, the current narrative from the Fed, White House and media is that the U.S economy is doing well and the Fed intends to hike interest rates at twice in 2016. Conversely, Japan’s economy is contracting and Bank of Japan continues to flood the system with liquidity. If anything, the dollar should be rapidly appreciating vs. the yen.
The only conclusion we can draw from this is that something has blown up in the global financial system which caused unpredictable instability in – and loss of control over – the Fed’s manipulation mechanisms.
I believe the likely culprit is Deutsche Bank. As I have commented on several times previously, Deutsche Bank’s balance sheet is a ticking financial nuclear time bomb. It’s thefinancial system’s “Hurt Locker.” Since March 11, Deutsche Bank stock is down 25% despite the inexorable move higher by the S&P 500. DB is down 9% in four trading days this week. Despite the Fed’s attempts to monetize DB’s derivatives (I will document in another blog post), DB’s stock is telling us that DB’s financial condition is melting down.
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