Currency Traders Sell The Yen As The 30 Year Interest Rate Breaks Out As The Announcement Of QE 2 Takes World Bonds And Stocks Higher … A Global Sell Off In Currencies Is Imminent

Investment market report for November 3, 2010

Introduction

The currency traders sold the Yen, FXY, today, to 121.91, as the bond vigilantes called the Interest rate on the US Government Bond, $TYX, higher, to 4.053%, which caused the longer out maturity US Government debt, that is, the 10 to 20 Year US Government Bonds, TLT, and the Zeroes, ZROZ, to fall sharply lower.

Fan Yang of FXTimes writes that the EUR/JPY pair exploded, after breaking out of a declining channel yesterday. After a quick throwback in the 4H chart that failed to break below the 50 SMA, the market shot up breaking the 114.00 level and 61.8% retracement (a strong level of resistance)    

The chart of FXE:FXY shows today’s Yen induced jolt higher … to the August 9, 2010 level … from which it previously fell lower.

The Euro, FXE, rose 0.67%, to close at 140.70 at the top of a broadening top pattern, suggesting that it has maxed out.

FXStreet reports EUR/JPY Soars After FED, Capped Under 114.90

Bonds as a whole rose strongly today

Long term corporate bonds, BLV, fell sharply as well, to the edge of a head and shoulders pattern. This portends a massive soon coming fall in the longer out business bonds, and higher interest for corporate borrowers.

The long term TIPS, LTPZ, fell too, manifesting a massive lollipop hanging man candlestick at the top of an ascending wedge.

World sovereign debt, BWX, rose. 0.60% to 61.84. Junk Bonds, JNK, rose 0.47% to 40.83. Emerging Market Bonds, EMB, rose 0.50% parabolically to 113.55. Total bonds, BND, rose 0.11% to 82.70

It is of investment significance that a falling Yen, FXY, and higher interest rate on the 30 Year US Government Bond, $TYX, turned down the so called longer out “inflation protected” bond, LTPZ.

The yield curve on the 30:10 US Sovereign Debt, $TYX:$TNX, steepened to 1.5551.

Total Bonds, BND, manifested a massive questioning harami, suggesting they will fall lower very soon.

Aggregate Bonds, AGG, looks topped out

Lehman Aggregate Bonds, LAG, also looks topped out.

It is my belief that in a desperate attempt to preserve the value of the the mortgage backed securities, MBB, the 2 to 5 Year US Government Notes, SHY, and the 3 to 7 Year US Government Notes, IEI, from market place depreciation, that the US Federal Reserve has introduced QE 2.

Bloomberg reports that  the US Federal Reserve Will Buy $600 Billion of Treasuries, the Fed’s Open Market Committee, FOMC, said in a statement in Washington, according to Bloomberg.

Including Treasury purchases from reinvesting proceeds of mortgage payments, the Fed will buy a total of $850 billion to $900 billion of securities through June, or about $110 billion per month, the New York Fed said in accompanying statement. He’s risking a strategy that may either fail or fuel inflation and asset bubbles, said Scott Pardee, a former New York Fed official who now teaches at Middlebury College in Vermont. The one of the five who has a vote this year, Kansas City Fed President Thomas Hoenig, today cast his seventh straight dissent, the most at consecutive regular policy sessions since 1955. “The risks of additional securities purchases outweighed the benefits,” and the “continued high level of monetary accommodation” may eventually “destabilize the economy,” the statement said of Hoenig’s opposition.

Chart of Mortgage Backed Bonds, MBB, shows what may be a top at 109.92, in a strong rally that has come from anticipation of QE 2.

Chart of the 3 to 7 Year US Government Notes, IEI, looks “triple topped out” at 119.03.

Currencies rose strongly today.

The Zealand Dollar, BNZ, rose 1.10%, to 24.91,  manifesting a lollipop hanging man candlestick

The Euro, FXE, rose 0.67%, to close at 140.70, at the top of a broadening top pattern, suggesting that it has maxed out.

The Australian Dollar, FXA, rose 0.49%, to 100.40, manifesting a lollipop hanging man candlestick,
World Currencies, DBV, rose 1.06%, manifesting a massive lollipop hanging man candlestick, suggesting a fall lower soon.

Developing market currencies, CEW, rose  0.52%, manifesting a massive lollipop hanging man candlestick, suggesting a fall lower soon as well.

The US Dollar, $USD, closed lower, in a questioning harami at 76.40.

All the currencies, when compared to the US Dollar, $USD, look terrifically over-bought.

Stocks traded mixed today

World stocks, ACWI, rose 0.55%.

The New York Composite, NYC, fell 0.27%; its chart looks topped out.

The S&P, SPY, rose 0.40%, manifesting a lollipop hanging man candlestick.  

Spain, EWP. shares fell after Bloomberg reports that Ireland Debt Swaps at Record High as Allied Signals 63% Chance of Default. The cost of insuring Irish sovereign debt surged to a record as credit-default swaps on Allied Irish Banks Plc subordinated debt signaled a 62 percent probability of default within five years. Contracts insuring 10 million euros ($14 million) of Allied Irish’s junior bonds cost about 3.25 million euros upfront and 500,000 euros annually, according to data provider CMA. That’s up from 400,000 euros a year in April. Swaps on the government’s debt jumped 27 basis points to 545. Swaps on Allied Irish’s senior debt increased 25.5 basis points to a record 706, CMA prices show. Ireland problems weighed on Europe’s indebted peripheral nations, with swaps on Portugal climbing 9.5 basis points to 418 and Spain up 3.5 at 228.5.

Exxon Mobil, XOM, manifested a lollipop hanging man candlestick after having manifested three white soldiers, suggesting that it will fall lower.  

Emerging market shares, EEM, rose 0.62%, to 47.50, manifesting a lollipop hanging man candlestick.

International Dividend Payers, DOO, rose 0.70%.  

The 0.20% rise in International Utilities, IPU, to close at 21.85,  commuicates the topping out of stocks globally.

The resistance in the chart of the Nasdaq Internet shares, PNQI, communicates that these high tech stocks have done all they can do and will do no more. The same can be said for Internet holders, HHH.

The lollipop hanging man candlestick in the chart of Dow Internet, FDN, communicates the rally in Internet stocks is over. 

The broadening top pattern in Apartment Investment and Management Co, AIV, communicates a stock market top.

Chile, ECH, manifested a bearish engulfing candlestick, and fell 1.1% lower.

The chart of Turkey, TUR, communicates that the rally in emerging market stocks is over.

Health Care REIT, HCN, fell 1.6%.

Debt laden Blackrock, BLK, fell 4.2%.

The Baltic Dry Index, $BDI, fell lower after having hit resistance.

The ratio of the small cap pure value shares, RZV, relative to the small cap pure growth shares, RZG, … RZV:RZG, has been falling since October 12th, 2010, when the Interest Rate on the 30 Year US Government Bond, $TYX, turned up, suggesting that competitive currency deflation, that is competitive currency devaluation, commenced on October 12, 2010.    

The World Shares Yen Carry trade, ACWI:FXY, turned down October 12, 2010, as the Interest Rate on the 30 Year US Government Bond, $TYX, turned up to 3.7%. This suggests that the rising interest rate on the 30 Year US Government Bond, is a major factor in turning down the value shares compared to the growth shares.    

FXStreet in article EUR/JPY Soars After FED, Capped Under 114.90, presents a 1 Day, a 1 Month, a 3 month, and a 1 year chart of the EURJPY. The one month chart shows a rise to close at114.68, which is the October 9 value. This chart action suggests that the higher interest rate on the 30 Year US Government bond is destabilizing the euro yen carry trade.

Conclusion

Today’s fall in the Yen, FXY, is a  deflation reaction to the rising Interest rate on the 30 Year US Sovereign Debt, $TYX, and rising credit default swaps on Portugal and Ireland Sovereign Debt.

The bond vigilantes in calling the interest rate higher on the 30 Year US Government Bond, turned the currency traders hand lower on the Yen. This will force the currency traders to become currency vigilantes introducing competitive currency sell offs and competitive currency deflation.

The currency traders will be selling the world’s currencies, DBV, and emerging market currencies, CEW, causing an unwinding of yen carry trade investment in bonds, BND, including Junk Bonds, JNK, emerging market bonds, and the world stocks, ACWI.

Debt Deflation is on the way: both bonds, and stocks will be going down.    

Debt deflation is the contraction and crisis that follows credit expansion.  One of the most famous quotations of Austrian economist Ludwig von Mises is from page 572 of Human Action: “There is no means of avoiding the final collapse of a boom brought about by credit expansion.  The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved.”

Peak Credit has been achieved. We have reached the end of credit liquidity and will be going into the end of credit.

The chart of small cap financial and sub-prime automobile lender Nicholas Financial, NICK, communicates that Peak Credit has been achieved. There will be diminishing credit for the middle class and small businesses, as the chart of American Express, AXP, hit resistance and closed lower. The chart of Student lender Nelnet, NNI, appears topped out.

Junk Bonds, JNK, looks terrifically over-bought.

Emerging Market Bonds, EMB, has risen parabolically higher..

World Corporate Bonds, PICB, appears topped out.

World Government Debt, BWX, appears topped out.

Bonds, BND, rose to a new high and manifested a massive questioning harami, suggesting that Total Bonds has topped out.

Today, November 3, 2010, was a rally high for the world’s stock and bond traders as they celebrated the flow of investment liquidity from the US Central Bank and carry trade investing.

China small caps, HAO, was one of the celebrators, rising 1.0% to close at 122.19.  And, Poland, EPOL, a favorite for yen carry traders, rose 1.2%. And mortgage finance, KME, got the investment cool aid as well, rising 2.7%   

Today was a disaster for those invested long in US Sovereign debt, TLT as the bond vigilantes called the longer out rate higher, as the US Central Bank’s QE 2 constitutes monetization of debt.

The spigot of investment liquidity from the US Central bank has turned toxic, as it is now monetizing debt.

And the spigot of investment liquidity from carry trade investing will be turned off as carry traders sell off the major currencies, DBV, and emerging currencies, CEW, given that they are over-bought and there is rising risk aversion coming from the higher 30 year rate, and rising European credit default swaps.

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One Response to “Currency Traders Sell The Yen As The 30 Year Interest Rate Breaks Out As The Announcement Of QE 2 Takes World Bonds And Stocks Higher … A Global Sell Off In Currencies Is Imminent”

  1. Mr.Kowalski Says:

    Hi Yen.. say.. will the BOJ keep pace with the Fed ? I heard somewhere that the Japanese Gov’t recently allowed the BOJ to begin POMO, even in foreign markets. Is this so ? Will the Yen sink meaningfully below 80 ?
    I’ll definitely be a regular reader.. terrific blog.

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