Central Bankers Give Up (...all pretense)

In an attempt to convince the world that the economy was, indeed, robust, the FOMC recently raised rates. It was also a bid by the Fed to retain what little credibility it has left. It failed.

As I have been writing for the past couple of years, the yen carry trade [what’s this?] has been the primary lever of higher stock prices since 2011. As long as the yen continues to get cheaper and the dollar richer, the USDJPY climbs higher — taking stocks along with it.

But, the Fed’s actions exacerbated a currency crisis going on in secondary markets. Hot money from the slush fund known as Japanese financial markets flowed back into Japan. The yen strengthened. Two days ago, the USDJPY plunged below the bottom of a channel dating back to October 2014 — seen above in red. As we pointed out at the time, every dip to the bottom of this red channel has caused a sell-off in stocks. And, each successive dip has produced larger and larger sell-offs. This latest one, which dipped below the channel bottom, produced the worst.

At the same time, SPX and ES dipped below necklines of large Head and Shoulders patterns that targeted additional 15% declines. As I wrote yesterday:

If, on the other hand, it closes back above 1887 or so, then bulls can breathe a little easier. The RSI charts indicate it’s not too late. But, again, it can’t happen without CL and/or USDJPY moving dramatically higher. Today was a start. Will they keep it going? It must start right here, right now.

Last night, “sources” leaked that the BoJ would increased QQE — code for a higher USDJPY, which enables the yen carry trade to soldier on. Kuroda begrudgingly confirmed the reports this morning. USDJPY is up over 2% since Wednesday’s lows. And, Saudi Arabian Oil CEO Khalid Al-Falih confirmed that oil had overshot to the downside, and was due to rebound. CL is back in its falling red channel, having spurted 15% higher in the last two days. This is equivalent to a 285-pt rally in the S&P 500 or a 2,400-pt rally in the Dow.

Is it any wonder the futures are up over 30 points at this time? Central bankers won’t be able to toot their “the economy is good enough that it doesn’t need supporting anymore” horns. Oh, well. Credibility is overrated, anyway.