The Backstreet Boys of the Financial Markets

Mario Draghi, Shinzo Abe, Haruhiko Kuroda, Mark Carney and Ben Bernanke* are what I call the Backstreet Boys of the Financial Markets. *Janet Yellen is new and she did nothing ‘till now to deserve a place in this music band.

Mario Draghi

In the last 2 years, the ECB enjoyed the cheapest monetary policy, thanks to Mario Draghi’s magic words “whatever it takes”. While FED, BoE or BoJ had to print money to “save” their economies, investors bought Europe based on the safety net offered by ECB’s leader. How can someone stay apart and not buy European Bonds or equities when the central bank says that there is no risk of default no matter what. These days, everyone is monitoring Mario Draghi: he speaks and the investors are listening but no one seems ready to make the first move.

Shinzo Abe and Haruhiko Kuroda

On the other side of the planet, BoJ is having the most expensive monetary policy in order to achieve the 2% inflation target by 2015. Shinzo Abe won the elections in Japan because he was seen as the “saver” of the Japanese economy after a decade of deflation and lack of growth. Soon after his election, he replaced Masaaki Shirakawa (that time the BoJ governor) with Haruhiko Kuroda – a man with more dovish ideas. After one year of money printing, some good signs are coming up for the Japanese economy but there seems to be a problem: the “signs” are good enough for Haruhiko Kuroda to say that no more easing is needed and that the BoJ will achieve the 2% inflation target with the current qualitative and quantitative easing while Shinzo Abe has a different opinion. For now, any political pressure for BoJ to add new easing measures is excluded. After all, Haruhiko Kuroda is not Masaaki Shirakawa but will be very interesting to see who will convince who, in the next following months.

Ben Bernanke

At the end of 2012, the FED issued an $85bln quantitative easing program - under Ben Bernanke’s guidance - and one year later, he called the taper of the same program. In January 2014, we had the first $10 bln cut and by the end of the year, there should be no more QE left. It has to be a miraculous QE if only after 1 year, cured the US economyJ. It’s well known the saying that when America sneezes, the rest of the world catches a cold. I wonder if it works even in the other way, now that the US economy is almost healed.

Mark Carney

There was not much work to do for him since he replaced Mervyn King at BoE. However, he introduced the forward guidance, which changed it after only 6 months. The problem was the unemployment rate that was dropping too fast (or at least faster than he anticipated). The UK is still printing money but from the three developed economies that runs the QE, the BoE has the smallest amount of money printed. Comparing with the US economy, in this case, I have no doubts about a strong recovery of the economy but I also think that is already fully priced in GBP’s current value.

 

I was a teenager when the Backstreet Boys were in vogue and I remember that every single radio station, every single TV channel played their songs at least a few times a day, every day. I am not a big fan of the pop music and neither of the Backstreet Boys but I have to admit that in those times the world was moving on “quit playin’ games” or “shape of my heart” rhythms.

Exactly as in the last 2 years, the world is moving on the new Backstreet Boys rhythms:

  • “Whatever it takes” plus QE3 lifted the eur/usd from 1.2800 till almost 1.4000
  • QE3 plus bigger qualitative and quantitative easing lifted usd/jpy from 78.00 till 105.00
  • Smaller QE and a higher interest rate plus a bigger QE and a smaller interest rate lifted gbp/usd from 1.4800 till 1.6800

It’s useless to say how the rest of the world played this piecesJ.

The thing is that, now, the true Backstreet Boys are only a music band that once made the girls go crazy and no one is crazy about them anymore. I have the feeling that more or less the same thing will happen in the Financial Markets very soon. The investors are tired to hear Mario Draghi blabbering, as they are tired to wait endlessly for the BoJ to increase the printing volume.

I will leave Mr Draghi and his “threats” for later and I will deal with the BoJ for now.

If the Japanese qualitative and quantitative easing program drove the usd/jpy above 105.00, now that the FED is tapering and the BoJ is still printing money at the same pace, why the usd/jpy is having such a hard time to break that level? US economy is recovering and doesn’t need the medicine anymore while the Japan is still coughing and has at least one more year before the treatment could end. And there is more: many analysts and investors expects to see even more easing in Japan. So why the heck usd/jpy is not trading above 105.00 then?

My take is that because no one really believes that BoJ will add other easing measures, as no one really believes that the QE taper in USA is because of a recovery of the economy. The QE taper came because the FED realised that the huge money printing made more damages than helping the real economy. Maybe Haruhiko Kuroda does not want to make the same mistake that FED did and he will refuse to add more easing. Who knows?

Looking on the weekly chart of the usd/jpy I’d say that the investors are preparing to buy the JPY so instead seeing this pair going above 105.00 we might see it going under 100.00 very soon. Remember that the weekly chart provide us a long-term view so don’t jump on short usd/jpy in the next 5 minutes but rather look for a higher level to sell from.

I’d say that there is a pretty strong bearish divergence with the RSI on the weekly chart and a descending triangle at the top of the bullish trend that could suggest a reversal if the rate action breaks the base. A negative divergence in a few days of age should be treated with caution, while one that spans several weeks’ worth all the attention.

When and if the usd/jpy rate action will go back above 103.00 I will sell this pair with two hands with the SL above 105.50. The blue rectangle shows the first important support area so the target could be between 94.00 and 96.00. You don’t have to trade it on long term but you can get in and out every time this pair meets a daily support area and makes a pullback.

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Tags: Bernanke, BoJ, ECB, FED, Kuroda, QE, jpy, usd

Comment by Daologic on April 25, 2014 at 4:53am

Hello Arenoosh! I have to admit you are a talented writer. How much time untill you write the Harry Poter of financial markets? I also like you analysis per se!

All the best!

P.S. Why so rare lately?

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