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Bruce Krasting: FX Market – Ben’d Over?

There is a slow motion “run on the dollar” taking place. It is popping up in the big money centers and the small. The markets are all orderly so there is no sense of panic. But there is a non-stop movement out of dollars. One week it is into the CHF, the next to the Pound the Euro or the Yen. Some of it is going to gold and other PMs. But when I see that that Brazil, Russia and S. Korea are intervening to offset a supply of unwanted dollars I get worried. The money is moving. Once the process starts it can get messy. October is often a time for messy things to happen. The move against the dollar is about Ben Bernanke and his non-stop hints of QE-2. The FX market is just going through the process of adjusting to the reality that will be with us as of 11/3. More QE is coming. Bernanke has been leaking bits and pieces of his plan to the press in order to give the market a heads up on what is coming. He wants the markets to adjust to reality before it is a reality. That way he can say that the post market reaction to QE2 was muted. One area to keep an eye on this week is the JPY. It is possible that the Yen becomes a flash point for a jump in FX volatility and an increase in the money flow. I have been looking for signs that would give us some hints on the tactics to be used by the BoJ in its intervention policy. I want to know if the BoJ is on offence or is it playing defense. If it is defense the door is open for some action that could spill some milk. There are few tea leaves to look at. Some information from the Japanese Ministry of Finance got me to thinking. MITI has reported that the magnitude of currency intervention since September 15th was Yen 2.125T. This amount is a bit larger than the Y2T that was being discussed. MITI did not confirm it, but this number makes me believe that the BoJ did a very splashy job of publicly disclosed intervention on 9/15 and they did small amounts (that were not disclosed) on at least one other occasion. Most likely the second intervention took place on 9/24. Consider the amount. 2.125 T. A curious number. Why such an odd amount? It could be random, the sum of the concerted intervention just happened to total to this amount. But that does not line up with Japanese precision. So I am left wondering. It just so happens that if you take Yen 2.125T and divide it by 85.00 you get exactly $25,000,000. That is a nice round number that makes me happy. My take is that the BoJ made an internal decision to intervene for a fixed dollar amount. It was not an open-ended approach. I think someone (Shirakawa) said, “Lets buy $25b if the dollar slips below 83.” After that we will just see what happens.” That strategy would be defense. It means the dollar will have to grind lower. I expect the next BoJ intervention to occur in a range of 81.80 and 82. After that round is digested the BoJ will drop its intervention to yet another lower level. Probably closer to 81. Should that prove to be the case it will result in some big moves in all the Yen crosses. The dollar may catch a short term bid against the Europeans if we see money flow out of EURJPY. But that will be a head fake and an opportunity to sell more dollars. If the BoJ signals that it is in an orderly retreat the net affect will be a broad move out of the dollar. I am expecting a big volume week.

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