According to folklore, if a groundhog emerges from its burrow then a spring thaw will come early. If, instead, it sees its shadow, it’s scared back into its burrow and winter will continue for another six weeks.
Haruhiko, the carry trade groundhog, poked his head out of his burrow last night, saw the strikingly bright light of futile, failed policy, and quickly withdrew. There will be no more QQE (at this time) to thaw the market’s recent freeze.
Although the yen can and has been heavily manipulated without QQE expansion, it’s been a key component of the carry trade since 2011.
USDJPY traded as low as 119.39 before the intervention arrived, boosting ES by 6-7 points in the hour after dismal retail sales and Empire Mfg numbers raised “bad news is good news” hopes that the Fed won’t also disappoint.
But, the bottom line is that it’s now up to the FOMC to prevent an extended winter for stocks.
continued for members…While futures are still clinging to those gains, it looks more like a backtest than anything else. 
And, unless USDJPY suddenly zips back above 120.11, I think we’ll see a pop and drop in SPX.
It shouldn’t be much, as the narrative is still that the FOMC will prevent any serious drop by staving off a rate rise tomorrow — especially with the latest “proof” that more accommodation is needed. If there is an increase, it is expected to be small – perhaps 1/8%.
CL is in a position to help, but also looks like it’s favoring a selloff at this point.
UPDATE: 9:33 AM
It probably goes without saying that swing traders should sit this one out, as the Fed’s announcement on Thursday will render everything that happens between now and then moot.
And, remember, the absence of additional QQE doesn’t mean the BoJ (and others) will cut back on the amount of currency manipulation they do. It simply won’t be justifiable on the basis of flow of funds or fundamental economic principles. But, of course, that ship sailed a long, long time ago.
UPDATE: 10:33 AM
Though, depending on when USDJPY tags 120.11, we could get significant resistance at the .618 at 1969.06.
Very heavy USDJPY manipulation going on this morning, so keep stops tight if you’re playing the breakout.
UPDATE: 10:48 AM
Tight stops are still advised, and be ready to revert to long if USDJPY decides not to reverse at 120.11.
UPDATE: 12:08 PM
TPTB seem determined to turn the carry trade frown upside down. USDJPY is closing in on its .786…
The .786 at 1977.72 is looking quite likely.
UPDATE: 1:32 PM
There’s the .786…
UPDATE: 2:50 PM
Watch your stops. SPX still going…
…even after USDJPY maxed out. Next stop 1982.88 — all algo, all the time.
CL taking over the ramping duties on a very aggressive backtest…
With a little over an hour to go, odds are that SPX will close just below the .886 and gap open past it in the morning, or that it’ll reverse just below it, leaving traders with a difficult choice going into the close.
I’d be neither long nor short overnight leading up to this FOMC announcement. I’ve been adamant that there would be no rate increase in September. But, given what we’ve seen today, I see no compelling reason to bet on it.
UPDATE: 3:11 PM
