EC This Yen Decline Is Different

I had planned on writing my "green" bubble candidate post today, but then the Yen went and had its third-biggest move in the past couple of years.

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You might be saying, "so what? Currencies move all the time. Why is this move important?"

Yen declines are typically associated with risk-on environments, so when the Yen started cratering this morning, the machines grabbed a huge stack of blue tickets and bought equities like they were the final few Admirael van der Eijck tulip bulbs on offer.

I have a theory about why Yen declines are often accompanied with risk-on buying. More often than not, it's the massive Japanese post office or other pension plan selling Yen to buy US assets. They drive down the price of the Yen while simultaneously sending up the price of stocks. The algos have rightfully recognized this relationship and often front-run the buying. Regardless, the important thing to understand is that the Yen declines not because of a fundamental issue with the Japanese currency, but rather due to portfolio moves from investment plans.

This is NOT the reason for today's move.

The Japanese have recently experienced their second-worst quarter of GDP growth in the past decade.  

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The reason FX traders are selling Yen with both fists? Because the Japanese economy is imploding.

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I don't want to get into the stupidity of Japanese economic policy, but instead, stress one important point - the Yen selling was not because of portfolio flows, rather it was investors fleeing Japan because of poor economic prospects going forward.

Yeah, a good portion of that money found its way into US risk assets today, but this is not a positive development.

The world is slipping into a global slowdown (recession?) and America is attracting all the capital from investors who believe the US is somehow immune.

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Adam Reynolds 1 month ago Member's comment

Don't you think the coronavirus will have a large impact?