Reuters reported over the weekend that the BoJ was “brainstorming” an overhaul of its massive QQE program. Given that equities have been sliding ever since USDJPY’s rising trend was broken in mid-August (the white arrow, below), I’d say the term “brainstorming” doesn’t convey near enough desperation. 
As the article points out, the BoJ now owns 25% (some say 30%) of all JGBs. It’ll be 40%+ in 2016. And, given that most banks, insurers and brokers are required to hold JGBs for collateral purposes, one can easily envision a shortage of bonds for QQE.
What the article doesn’t mention, however, is the BoJ’s massive and growing position in equities. Along with the GPIF, it amounts to around 18% of Japan’s GDP. It’s hard to imagine them throwing a huge leveraged bet like that under the bus on a technicality like what’s eligible collateral under the QQE guidelines.
And, let’s remember that it isn’t the growth in money supply per se that’s propping up stocks. It’s the money directed at equity purchases and, more importantly, the ongoing yen debasement that fuels the yen carry trade.
The BoJ and others are very adept at manipulating the USDJPY — down to .01 moves when need be — in order to keep the carry trade alive. But, at some point, it’s going to be pretty obvious to everybody that the USDJPY has gone nowhere since first tagging the yellow .618 at 120.11 on Dec 4.
However they accomplish it, BoJ has to hammer the yen lower or face the consequences of its inaction. On Dec 4, NKD closed at 18,105. Nine months later, with USDJPY still lingering near 120.11, NKD is trading at 18,060. The 3,000 point (16%) rally in between is a rapidly fading memory.
Brainstorming? It’s more likely that BoJ is mapping out the exact time and place for USDJPY’s next leg up.
continued for members…
The DX chart implies there is more upside available for USDJPY should TPTB wish to pursue it. A backtest of the SMA200 at the white channel midline looks like a slam dunk.
Though, on a smaller scale, there is Fib resistance at 95.80.
Without it, SPX looks to backtest the rising purple channel at around 1969.28, and nothing more.
The rising purple channel broke down Friday. In the old days, that would have been a dire development. These days, a couple of central bankers can take to the airwaves and “fix” things in a jiffy. We have several scheduled for this week.
FWIW, keep an eye on CL today. It’s nearly to the point where it must make a decision whether to break out or break down. It will likely depend on what the BoJ decides, as lower prices will be made available if BoJ comes through with more easing.
Only economic news coming out today is from the jokers at the NAR.
UPDATE: 9:36 AM
USDJPY would benefit from a backtest of the .618 Fib at 120.11.
UPDATE: 10:02 AM
SPX overshot the channel bottom and is making a bid to backtest it. Keep an eye on SMA10 support coming up on the 5-min chart. It’s often a source of algo-driven momentum. If they can hold SPX here at 1969ish, then the approaching SMA10 will likely carry it higher. I’d dump the short position if SPX pushes through the yellow SMA100 again.
Note that DX could well be under selling pressure if EURUSD catches some support from the upcoming SMA200 and rising white TL shown below.
UPDATE: 10:20 AM
I’d be a lot less nervous if VIX would confirm the move with a push below the rising white TL from Aug 5.
EURUSD just reached the SMA200, so perhaps it will lend a hand.
UPDATE: 10:54 AM
UPDATE: 11:05 AM
Beware of the upcoming USDJPY daily SMA200 at 120.82 — slightly higher than the .886. DX is approaching its corresponding daily SMA200 at 96.177.
It should be enough to get SPX up to the 5-min SMA200 at 1982ish, particularly if it can get a bounce from the approaching SMA20 (white.)
At that point, if not sooner, DX should reverse lower and USDJPY should draw back below the red channel line it’s currently pushing up against.
UPDATE: 11:34 AM
UPDATE: 11:37 AM
Note that VIX has broken that rising TL and is backtesting it.
Swing traders take note: here’s a look at the potential IH&S that targets 2006.50 — also the purple .786. If it plays out, looks like it could happen late tomorrow.
I’d give this long position some leeway, perhaps the SMA100 at 1968.78, before cutting it loose. There’s always the possibility that they have the .146 in mind for the right shoulder. It might even allow USDJPY to backtest 120.11.
UPDATE: 12:05 PM
Of course, at this point the risk is that SPX catches a ride south on the declining 5-min SMA10. The fact that neither USDJPY nor CL is rallying in order to prevent it makes me very nervous about any kind of a long position, no matter how logical an IH&S might be at this point.
UPDATE: 12:28 PM
UPDATE: 12:38 PM
The ballbuster move would be a close back at 1974, the bottom of the purple channel.
UPDATE: 12:50 PM
…as USDJPY is also selling off.
The risk is that USDJPY picks up support at the 60-min SMA100 at 120.24, or at 120.11. Keep an eye on it, as that would provide at least a bounce.
UPDATE: 12:57 PM
USDJPY just bounced at the SMA100, so we should expect the same of SPX here at 1956.69. I’m not sure it would be this close to 120.11, however, without putting in a backtest. It’s a close call, but I’d expect more downside unless USDJPY suddenly reverses. Watch for the falling 5-min SMA10.
UPDATE: 1:17 PM
But, given that the 5-min SMA20 is just above, there’s a very good chance of a head fake here. Step aside if, like me, you are tired of this micro-manipulation taking place every few minutes.
UPDATE: 2:11 PM
UPDATE: 2:29 PM
That lasted all of 10 minutes. With USDJPY faltering…
…it’s CL to the rescue. A breakout that quickly faded…
UPDATE: 2:38 PM
Odds are it’ll be VIX that breaks the logjam.
UPDATE: 3:34 PM
Haven’t seen a +10 pts day feel so negative in a while.
UPDATE: 3:57 PM
Last chance, SPX…