What has the Yen flash rally of 2019 taught us?

Yesterday we took a look at the low-level of bond yields for this stage in the cycle and the US Treasury Note yield has fallen further since to 2.63%. Also I note that the 0.17% ten-year German bond yield is being described as being in interest-rate cut territory for Mario Draghi and the ECB. That raises a wry smile after all the media analysis of a rise. But it is a sign of something not being quite right in the financial system and it was joined last night by something else. It started relatively simply as people used “Holla Dolla” to describe US Dollar strength ( the opposite of how we entered 2018 if you recall) and I replied that there also seemed to be a “yen for Yen” too. So much so that I got ahead of the game.

What I was reflecting on at this point was the way that the Yen had strengthened since mid December from just under 114 to the US Dollar to the levels referred to in the tweet. For newer readers that matters on two counts. Firstly Japanese economic policy called Abenomics is geared towards driving the value of the Yen lower and an enormous amount of effort has been put into this, so a rally is domestically awkward. In a wider sweep it is also a sign of people looking for a safe haven – or more realistically foreign exchange traders front-running any perceived need for Mrs.Watanabe to repatriate her enormous investments/savings abroad  –  and usually accompanies falling equity markets.

The Flash Rally

I was much more on the ball than I realised as late last night this happened. From Reuters.

The Japanese yen soared in early Asian trading on Thursday as the break of key technical levels triggered massive stop-loss sales of the U.S. and Australian dollars in very thin markets. The dollar collapsed to as low as 105.25 yen on Reuters dealing JPY=D3, a drop of 3.2 percent from the opening 108.76 and the lowest reading since March 2018. It was last trading around 107.50 yen………..With risk aversion high, the safe-haven yen was propelled through major technical levels and triggered massive stop-loss flows from investors who have been short of the yen for months.

As you can see there was quite a surge in the Yen, or if you prefer a flash rally. If a big trade was happening which I will discuss later it was a clear case of bad timing as markets are thin at that time of day especially when Japan is in the middle of several bank holidays. But as it is in so many respects a control freak where was the Bank of Japan? I have reported many times on what it and the Japanese Ministry of Finance call “bold action” in this area but they appeared to be asleep at the wheel in this instance. Such a move was a clear case for the use of foreign exchange reserves due to the size and speed of the move,

There were also large moves against other currencies.

The Australian dollar tumbled to as low as 72.26 yen AUDJPY=D3 on Reuters dealing, a level not seen since late 2011, having started around 75.21. It was last changing hands at 73.72 yen.

The Aussie in turn sank against the U.S. dollar to as far as $0.6715 AUD=D3, the lowest since March 2009, having started around $0.6984. It was last trading at $0.6888.

Other currencies smashed against the yen included the euro, sterling and the Turkish lira.

There had been pressure on the Aussie Dollar and it broke lower against various currencies and we can bring in two routes to the likely cause. Yesterday we noted the latest manufacturing survey from China signalling more slowing and hence less demand for Australian resources which was followed by this. From CNBC.

 Apple lowered its Q1 guidance in a letter to investors from CEO Tim Cook Wednesday.

Apple stock was halted in after-hours trading just prior to the announcement, and shares were down about 7 percent when trading resumed 20 minutes later.

This particular letter from America was not as welcome as the message Tim Cook sent only a day before.

Wishing you a New Year full of moments that enrich your life and lift up those around you. “What counts is not the mere fact that we have lived. It is what difference we have made to the lives of others that will determine the significance of the life we lead.” — Nelson Mandela

So the economic slow down took a bite out of the Apple and eyes turned to resources demand and if the following is true we have another problem for the Bank of Japan.

“One theory is that may be Japanese retail FX players are forcing out of AUDJPY which is creating a liquidity vacuum,” he added. “This is a market dislocation rather than a fundamental event.”

Sorry but it is a fundamental event as Japanese retail investors are in Australian investments because they can get at least some yield after years and indeed decades on no yield in Japan. This is a direct consequence of Bank of Japan policy as was the move in the Turkish Lira which is explained by Yoshiko Matsuzaki.

This China news hit the EM ccys including Turkish lira where Mrs Watanabe are heavily long against Yen. I bet their stops were triggered in the thin market. Imagine to have TRYyen stops in this market.

So there you have it a development we have seen before or a reversal of a carry trade leading the Japanese Yen to soar. Even worse one caused by the policy response to the last carry trade blow-up! Or fixing this particular hole was delegated to the Beatles.

And it really doesn’t matter if I’m wrong
I’m right

Bank of England

It too had a poor night as whilst it is not a carry trade currency with Bank Rate a mere 0.75% the UK Pound £ took quite a knock against the Yen to around 132. Having done this we might reasonably wonder under what grounds the Bank of England would use the currency reserves it has gone to so much trouble to boost? From December 11th.

Actually the Bank of England has been building up its foreign exchange reserves in the credit crunch era and as of the end of October they amounted to US $115.8 billion as opposed as opposed to dips towards US $35 billion in 2009. So as the UK Pound £ has fallen we see that our own central bank has been on the other side of the ledger with a particular acceleration in 2015. I will leave readers to their own thoughts as to whether that has been sensible management or has weighed on the UK Pound £ or of course both?!

To my mind last nights move was certainly an undue fluctuation.

The EEA was established in 1932 to provide a fund which could be used for “checking undue fluctuations in the exchange value of sterling”.

It is an off world where extraordinary purchases of government bonds ( £435 billion) are accompanied by an apparent terror of foreign exchange intervention.


I have gone through this in detail because these sort of short-term explosive moves have a habit of being described as something to brush off when often they signal something significant. So let is go through some lessons.

  1. A consequence of negative interest-rates is that the Japanese investors have undertaken their own carry trade.
  2. The financial system is creaking partly because of point 1 and the ongoing economic slow down is not helping.
  3. Contrary to some reports the Euro was relatively stable and something of a safe haven as it behaved to some extent like a German currency might have. There is a lesson for economic theory about negative interest-rates especially when driven by a strong currency. Poor old economics 101 never seems to catch a break.
  4. All the “improvements” to the financial system seem if anything to have made things worse rather than better.
  5. Fast moves seem to send central banks into a panic meaning that they do not apply their own rules.

We cannot rule out that this was deliberate and please note the Yen low versus the US Dollar was 104.9 as you read the tweet below.

Japanese exporters had bought a lot of usd/jpy puts at year end with 105 KOs so now they are really screwed … ( @fxmacro )

Me on The Investing Channel




13 thoughts on “What has the Yen flash rally of 2019 taught us?

  1. If I remember rightly one of the big pound falls post-Brexit vote took place overnight in Japan in light trading. It was investigated by the BOE.

    • Hi am

      Yes and oddly Sports Direct were involved as in addition to the sale of sports goods they seem to punt the FX market, and decided to close a position in thin late night markets for the £. This could turn out to be similar once we get the full story.

      But the central banks need to wake up to this sort of thing and their role in it. The new structure of markets makes such moves more likely something which should have been pointed out before rather than after the event.

  2. As always, the media are left scrambling to make sense of these types of moves to the sheeple, whose main barometer of wealth and wellbeing is their house price since most of them have no savings and only massive debts.

    The theories given are usually completely wrong or ascribe the falls to market moves that are influenced indirectly by the government and central bank policies that have taken years to manifest themselves in forex rates, and so the due to the passage of time the cause and the effect are never matched.

    As I have said on here on many occasions, these moves often come out of nowhere(remember the far east sterling crash after the BREXIT referendum anyone???) and are the result of the politicians and Bank of England officials thinking they can endlessly keep enacting policies that weaken sterling that they think they can manage as the falls appear small and manageable initially, but eventually you can stretch the rubber band only so far and then it just breaks. The collapse of sterling over the last forty or fifty years is simply breathtaking, in 1971 a pound would buy 10 swiss francs today just 1.25, in 1974 GBP.JPY was 700, today it gets you 135 yen, and yet you have people like Carney in charge at the Bank of England who considers his main role is to maintain the housing bubble at any cost, who will never be mentioned in any articles that look for explanations as to why sterling is so weak – uncertainty over BREXIT will always be to the fore in such articles.

    The collapse of a currency such as the £ will be so fast most people will never see it coming, there will be plenty of warnings, none in the mainstream media of course whose role is to look the other way until crashes happen, but on here and many other blogs and sites, the warnings have been there for years and ignored because they never materialised, the reason they never materialised was that central banks have distorted markets so much that they do not function efficiently anymore, so that shysters like Carney can run up grotesque bubbles in housing, credit and motor finance seemingly without consequences, but those consequences have not been eliminated, they are merely delayed, as eventually either market forces or the unwinding of the policies that led to them cause the inevitable reversions.

    In the same way the warnings that the stockmarket bubble created and maintained by central bank liquidity and zero interest rates was unsustainable were ignored, and now the minute QE is being cut and interest rates increased(in the US at least), the market goes into freefall. Many of these bubbles were financed by the Yen carry trade and as instability and volatility increase and falls in markets get bigger, huge losses will force more Yen short covering as the zero cost of capital that financed these trades no longer is zero, and hedging costs spiral out of control.

    All this merely leads to the inevitable introduction of QE4 in the US, which when it happens, signals to markets that central banks can never ever increase interest rates again and will forever monetise government deficits, I don’t think I need to spell out what that will do for such currencies as the pound.

    The banks QE balance sheet is currently £435billion, if QE4 goes ahead in the states it will have to be many multiples of previous iterations as its impact reduces the more it is done.


    • Good points well made, but I wonder whether the £ is also kept afloat by the ghastly truth about other currencies as well. For example:
      1. Japan seems to have incredible problems relating to public debt, public acquisition of bonds, shares etc and a population shrinking so fast that it will look worse and worse
      2. The USA is a mountain of debt
      3. The Euro doesn’t seem to have much cohesion at the moment in that different countries have clearly different views as to how to run their economies and not all of them fit into the euro.
      While I enjoyed Shaun’s article above in the sense that I found it interesting (although a long way above my head in parts), I also found it profoundly depressing that the world revolves around financial chicanery rather than reality.
      I spent some years in the city many years ago and I know all the arguments put forward as to liquidity etc, but is the world really a better place for all the hedge funds, derivatives, options exchanges? Are the banks really more useful because they have trading arms, rather than being focused on lending?
      I am afraid that these wild currency movements seem to emphasise the point – Japan didn’t suddenly become worth 8% more when measured against Australia in real life. It did so because of the crazy systems we have put on top of reality, including, as mentioned above, the algorithms which exaggerate the effects.
      It seems to me that the currency fluctuations are a symptom of a world dominated by financial traders (sorry, Shaun) and not by anyone involved in the real economy…
      Dull rant over.

    • Hi JRH

      I am curious as to how the public debt figures are being calculated there. Because if we stay with your example of Canada then if we subtract private debt from the total debt we are left with around 233% of GDP. Yet the actual ratio is officially 90%. So for the numbers to be true there needs to be a different method of calculation ( for example including future pension liabilities or the like). Is there any explanation that comes with the numbers?

  3. @James
    “Japan didn’t suddenly become worth 8% more when measured against Australia in real life.”

    I understand the lament. However, all I would say when I see such moves is that they are like earthquakes. Huge tectonic plates building up pressure against one another and then suddenly the slightest additional move leads to a sudden and huge shift. It seems to be a reflection of a growing realisation of what is and not what was thought to be and any additional little piece of information (China slowing followed by Apple numbers) leads to a particular new narrative being suddenly adopted by a lot of market participants at the same time.

    Okay, in this case a more technical aspect may be true – programme trading followed by the trigger pf retail stops in thin markets. But by the time the move has settled down, many more market participants will be cogniscant of the ‘story’ that led to the change in prices and will look for further evidence accordingly. Violent price moves can in themselves suddenly change the nature of how markets are subsequently traded by participants.

    In all other respects I am in full agreement. In a fiat economy it seems to me that the City’s erstwhile role in allocating scarce capital so that real world resources follow in its wake for us all to undertake the ‘best’ projects and activities has long gone. The City has now simply become a leech. It has largely killed its real world host in this country and seeks to do the same to the rest of the world where it can.

  4. What has the Yen flash rally of 2019 taught us?

    that the markets are controlled by algos that nobody fully understands or can control…..

    including the much vaunted Plunge Protection Team ….


    • Hi Forbin

      Perhaps the PPT believed the previous Tim Cook statements that all was fine with Apple and let down its guard after the market closed. Then suddenly Apple was down 7% and the hear was on.

      But perhaps one version of the PPT was revving up today for another go. If at first you don’t succeed…..

  5. In case anyone was worried that the Bank of England was asleep at the wheel as sterling is teetering on th edge of an abyss, rest assured – Mark Carney has jumped into action to assuage such fears, and appoints two women to deflect any criticism that the bank may have been lacking in diversity. As your pounds lose value every year from now on, just be satisfied that the bank is no longer sexist as your wealth evaporates. Otherwise you are a racist/sexist/bigot/nazi/right wing extremist, better to lose most of your savings than be called that eh?


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