Yen At A Crossroads As Global Liquidity Dynamics Tighten

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Liquidity drains will continue this week as the Treasury settles another $62 billion in T-bills. That will continue on Feb. 17, when it settles about $35 billion in coupons -- meaning over the next week, about $90 billion will need to be raised for settlement.

The bill schedule for the week of Feb. 17 could add another $60 billion to that total. This means that, over the next two weeks, we could be looking at $150 billion in settlements. However, we won’t have full details until later this week.

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What seems clear at the moment is that none of the money is coming from “cash on the sidelines” to fund the debt.

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Anyway, the point is that the cash is coming from somewhere; some of it appears to be showing up on dealers’ balance sheets, which may matter if it reduces liquidity in other parts of the market, such as leverage.

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Given how the stock market performed and the state of reserve balances, margin levels probably took a bit of a hit in January. I’d be shocked if they increased in any meaningful way.

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It looks like the LDP will win by a landslide in Japan’s weekend election, and that probably means PM Sanae Takaichi will get to “run it hot” on the economy. This weekend, the USD/JPY currency pair has already been seen trading just below the 158 mark, and the LDP win could potentially see it weaken even further.

At this point, the BoJ is dragging its feet, and the government is running really loose fiscal policy, so it makes total sense to see the USD/JPY pair rise further, and the threat of intervention really seems out of place, in my opinion. But it is clear they are worried about the 160 level.

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A weekly technical chart of the USD/JPY currency cross shows why. After 160 mark, the next level of resistance comes at around the 164 level, and that is it, because it would seem to me that the 220 mark would come next. It certainly sounds crazy, but then again, talk of the 10-year JGB trading over 2% sounded that way a year ago, too.

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Of course, the divergence between the Japanese yen and the interest rate differential is under greater strain, given how far they have already diverged. At this point, the only things that will reverse this trend are the yen strengthening, Japanese rates falling, or US rates rising. I don’t have an answer to which one happens first.

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We tend to care about this only because of the impact we have seen on our own market, specifically on the direction of the five-year cross-currency basis swap and the SPY. That trend has not broken for nearly four years now.

Right now, based on this chart, dollar funding conditions are easy, which is probably part of the reason why we have seen assets like Bitcoin and certain parts of the equity market get smashed while the broader index has held together.