Ask this guy: Haruhiko Kuroda, head honcho at the Bank of Japan. More than ever, he’s the guy who holds the key to the “market’s” future.
As we’ve explained many times, the yen carry trade has been the primary driver of stocks’ rise since 2011. In fact, without an ever-rising USDJPY, there is no rally.
This has never been more obvious than in the 14 months since USDJPY reached a key Fibonacci level of resistance at 120.11 — the 61.8% retracement of the drop from 147 to 75. It’s the dotted yellow line in the chart below.
USDJPY reached this Fib line in December 2014, and has gone essentially nowhere. In an unrigged world, it would have reversed down to the .500 Fib at 111.60 at a bare minimum. But, Kuroda & Co. know full well that a drop that low would have serious repercussions for stocks. How do they know? They tried it.
Nervous about the way an ever-cheaper yen gnaws away at purchasing power, they let the yen appreciate (a USDJPY decline) to as low as 115.56 later that month. SPX promptly plunged 107 points. They tried again in January 2015, just to make sure. This time, SPX fell 105 points.
They quickly ramped USDJPY back up to new highs — from 115 in January to 125 in June. Sure enough, SPX dutifully followed along, rising to new highs until peaking on May 22 at 2134. We called an impending top on May 20 not only because SPX had nearly reached our 2138 target [see: The Last Big Butterfly], but because USDJPY had run into serious overhead resistance.
Not only had it run into the bottom of a very long term channel, but fundamental factors were coming into play. Emerging markets were melting down. And, all that hot money that the Bank of Japan had created out of thin air came flowing back into the yen — dramatically strengthening it.
USDJPY held on until mid-August, at which point it plunged from 125 to 116 in about a week. SPX plummeted to 1867, a 267-point, 14.6% drop from its highs.
The BoJ wasted no time in getting USDJPY back to the key Fib level at 120.11, allowing SPX to recover over half of its losses. By the time they forced it up to 123, SPX had recovered 90% of its losses.
The strengthening dollar — exacerbated by the Fed rate increase and a spate of bad news out of China — again put pressure on emerging market currencies. Again, the yen strengthened, the USDJPY fell, drop-kicking SPX to new lows. This time, it fell 304 points, a 14.3% drop from recent highs.
Notice that each time USDJPY dropped between December 2014 and August 2015, it landed at the bottom of a nearly flat red channel. The yellow arrows indicate where it bounced. This latest time, it dipped slightly below that channel bottom — allowing SPX to close below the neckline of a large Head & Shoulders Pattern that suggested another 15% decline.
The BoJ got the message. Because, in the past two days, USDJPY has soared by 2.5% — well above the red channel bottom and over 2/3 of the way back to the .618 Fib at 120.11. SPX has bounced 96 points — about 5.2%. The Nikkei soared 9.4%. In two days.
Just to make sure the rebound didn’t stall, CL was ramped higher, too: a whopping 17.4%. It’s the equivalent of 2,800 points on the Dow. You can’t make this stuff up.
Is Kuroda serious this time? Will he maintain USDJPY at this level or higher? We know he’s motivated. Between the BoJ and the GPIF (the Japanese government employee pension fund) they own stocks worth about 15% of Japan’s GDP [see: Japan’s Equity Trap.]
And, they just had a pretty good scare. As of Wednesday, the Nikkei had fallen 25% since August 10 — a hit of almost 4% of GDP. It’s a pretty big number. But, wait, why has the BoJ’s equity portfolio increased?
Between August 10 and January 20, the BoJ’s ETF portfolio grew from 5.7 to 7.0 trillion yen — a 23% increase. Factor in the market losses, and the equity bet has actually grown by an astounding 57%! I ask, again…is Kuroda serious this time?
Imagine you’re standing at a craps table in Vegas. Before you flew in, you “borrowed” a rather large sum of money from your company’s pension plan. It’s 2 1/2 times what you make in a year, so there’s no chance of paying it back unless you win tonight. So far, you’re down 25%. Your wife is in tears, threatens to leave you. Laughing, you whip out your Amex and add another 57% to your bet, increasing it to more than it was in the first place.
That’s Kuroda. At 250% of GDP, Japan’s debt dwarfs that of the US, Germany, Italy — even Greece. By increasing his equity bet, funded by taxes and debt, he’s going all in. Losing is not an option. And, while he might lose his job if he fails (is Harakiri still a thing?), the Japanese people will be the ones in tears.
I see that picture up top, of Kuroda laughing his ass off, a lot. It’s obviously a moment of unbridled emotion. Someone might have told him a hilarious joke. Then, again, it might just be the delirious laugh of someone who bet the house on one last roll of the dice.
Stay tuned.
Note that the last time Kuroda et al levitated USDJPY, ES rebounded by 161 points, 117 of it in the first 24 hours. This time — an unimpressive 52 points.
