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Real markets matter. They dictate everything.

The bond market has a reputation for where the “smart money” plays, but it pales in comparison to the size, magnitude, and importance of the currency market. In fact, I would argue that everything that happens in financial markets is ultimately downstream from currencies.

I’ve said it before, and I’ll say it again - capital is like matter (from science class).

It is never created or destroyed. It merely transfers from one country, asset class, and sector to another. And it all starts in the currency market. So, if you’re not paying attention to this one important currency right now, you could be oblivious to the biggest crisis, or even better, opportunity of the year. (jump here)

People love to rag on the Federal Reserve for their experimental monetary policies over the years, and for good reason. But here’s the thing - although it’s bad in the U.S. when it comes to monetary policy, it’s worse over in Europe, and especially, in Japan. If you haven’t been paying attention already, you need to be watching the Japanese Yen right now. For years, its performance was a key “risk-on” or “risk-off” indicator, but now I think something much, much bigger is taking place.

Could the Bank of Japan be about to have its proverbial Bank of England moment from the 1990s?

I think so, and this means that the Japanese Yen could continue rapidly losing its value until the Bank of Japan does what the market demands. You see, the BOJ never abandoned its experimental monetary policy, even as the Fed and ECB raised rates in the past couple of years. In fact, the BOJ still has negative interest rates (NIRP) and overtly engages in Yield Curve Control (YCC) to maintain a steepened curve.

The problem is, inflation around the world is sticky.

And with some central banks moving back towards easing, it’s probably not going to get better anytime soon. Just a few weeks ago, the Bank of Japan was saying they may end their NIRP program, but I don’t think the market believes them (and neither do I, for now). The end result is that we could see the Japanese Yen continue to lose value against other major currencies. The Japanese economy already slipped from the third largest economy in the world, falling into fourth place behind Germany now.

Global capital is demanding more from the Japanese Yen, and if the BOJ can’t give it to them, then look for the Japanese Yen to break. The central bank’s hand will eventually be forced, and when that finally happens, then I think you will see the Yen rebound - and it probably won’t be pretty for the entire financial system.

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