BoJ Balks

Last Halloween, the BoJ treated the “markets” with an enormous increase in QQE that sent USDJPY soaring 15% over the next few months.  Thanks to the magic of the yen carry trade, it stopped the October meltdown dead in its tracks and enabled stocks to reach new all-time highs.2015-10-30 USDJPY v ES daily 0615Last night, with most pundits expecting a repeat performance, Kuroda & Co balked.  No increase in purchases.  No expansion of allowable investments. No new fuel for the carry trade fire. Nothing.

USDJPY, predictably, fell back below the SMA200.  2015-10-30 USDJPY60 0615Just as importantly, DX fell back within its falling channel.2015-10-30 DX 60 0615 About the only thing propping up stocks this morning is good old-fashioned currency manipulation.  That’s right.  The BoJ didn’t discontinue that!

While QQE certainly supports a cheaper yen, and the BoJ’s direct purchases of stocks (which will continue as before) obviously prop up the “markets,” it’s the act of manipulating the USDJPY higher that has enabled the yen carry trade’s success.

It has, can, and will continue to be utilized to push stocks higher and prevent dips whenever they see fit.  The only question is whether the rest of the carry trade investing world will stay the course given last night’s inaction by the BoJ.

We’re talking trillions of dollars around the world that are directly and indirectly tied to a ever-cheaper yen.  Right now, some of those investors are quaking in their shoes.  The risk is a tsunami that even the highest seawall can’t contain.

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