Where do you think USDJPY will go?

The Japanese yen is the second largest component of the Dollar Index (DX). It occupies 13.6% of it.

The real interest rate differential is the main reason behind the current severe weakness of the yen. I have already visualized it for you in my earlier post in August.

The Bank of England (GBP, 3rd largest part of DX) and lately the European Central Bank (EUR, the largest component of DX) raised their interest rates significantly during the last meetings. The Bank of Japan (BOJ), the Japanese Central Bank has kept its negative rate of -0.1% since 2016. Moreover, it repeated that it would not hesitate to take extra easing measures if needed, falling out of a global wave of central banks tightening policy.

Why BOJ is so dovish? There are several reasons. One of them, the history of inflation as shown in the chart below.

JPN Interest Rate VS Inflation

Source: TradingView

Japan has had a chronic deflation since the 1990s after the asset bubble burst. We can see how short term spikes of inflation (orange line) into the positive territory were short-lived. The BOJ didn’t even touch the interest rate in spite of inflation that has soared to unseen levels of 3.7% in 2014. This time around, the inflation didn’t race to the same peak and as I wrote above, the BOJ thinks of an opposite – easing!

The BOJ governor Mr. Kuroda said in the summer “If we raise interest rates, the economy will move into a negative direction.” The Japanese Central Bank does not want to cause a recession as the economy is still fragile.

Maybe the next chart could clarify the logic of the BOJ. Continue reading "Where do you think USDJPY will go?"

Are Gold Equities on the Cusp of an Upswing?

The Gold Report: Ron, the Federal Reserve has decided to continue quantitative easing (QE) for the foreseeable future. Gold has risen steadily since that news. Is that what you predicted the Fed would do?

Ron Struthers: It is not that hard to predict the Fed's behavior when you understand what it's trying to do and how it's trying to do it. I do not take what they say literally, except within the context of its goals. The Fed is trying to instill confidence in the economy because of massive U.S. debt and its future debt appetite. The economy needs to improve for there to be higher tax receipts. We need foreign investment to finance the debt. If the Fed can convince Americans and those abroad that its bonds are the safest/most attractive, its stock market will have the best returns and that debt machine keeps running.

But the truth is that the economy is very weak. Employment is weak. Foreign investment has been fleeing. The Fed has to purchase $85 billion of debt a month because nobody else will. The Fed can't do this forever, and it knows it. It has to talk as if the economy is improving so the Fed debt purchases can end in the near future.

If you dig into what's really going on in the economy and markets, you'll find the underlying weakness that guarantees that QE will be here for a long time, as least as long as the markets themselves will allow it or are tricked into allowing it.

TGR: Why are Americans so complicit in this? Continue reading "Are Gold Equities on the Cusp of an Upswing?"