The USD/JPY exchange rate is the most important overall economic indicator. I wrote in my last article, "The Easy Button," that something must be done to strengthen the yen. The solution I propose is that the U.S. Federal Reserve (Fed) can exchange an unlimited amount of newly printed dollars with the Bank of Japan (BOJ) for yen. In this way, the Bank of Japan can provide unlimited U.S. dollar firepower to Japan's Ministry of Finance (MOF), allowing them to purchase yen in global foreign exchange markets.
While I still believe in the effectiveness of this solution, it seems that the central bank charlatans responsible for the “Group of Fools”, also known as the G7, have chosen to convince the market that over time the yen will become weaker and weaker than the dollar, euro, The interest rate differential between British pounds and maple syrup (Canadian dollars) will narrow. If the market believes this future state, it will buy the yen and sell everything else, mission accomplished!
For this magic to work, the G7 central banks (Federal Reserve, ECB, Bank of Canada and Bank of England) with “high” policy rates must lower their interest rates.
Image source: MarsBit
Notably, the Bank of Japan’s policy rate (green) is 0.1%, while other countries’ policy rates are 4-5%. The interest rate differential between domestic and foreign currencies fundamentally drives exchange rates. From March 2020 to early 2022, countries were playing the same game. As long as you stay home with a cold and inject yourself with mRNA heroin, everyone can make money for free. When inflation manifested itself in such a dramatic way that elites could not ignore the pain and suffering of ordinary people, the G7 central banks - with the exception of the Bank of Japan - aggressively raised interest rates.
The Bank of Japan cannot raise interest rates because it owns more than 50% of the Japanese government bond (JGB) market. As interest rates fall, JGB prices rise, making the Bank of Japan look solvent. However, if the Bank of Japan allows interest rates to rise, causing its holdings of Japanese government bonds to fall, the highly leveraged central bank will suffer catastrophic losses. I do some scary math for readers in Easy Buttons.
Because of this, if Yellen, the "bad woman" who calls the shots in the G7, decides to narrow the interest rate spread, then the central bank with "high" policy interest rates will have no choice but to lower interest rates. According to orthodox central bank thinking, if inflation is below target, lowering interest rates is a good thing. What is the goal?
For some reason, and I don't know why, the G7 central banks all have an inflation target of 2%, regardless of differences in culture, growth, debt, demography, etc. Is the current inflation rate quickly topping 2%?
Image source: MarsBit
Each colored line represents a different G7 central bank’s inflation target. The level is 2%. No G7 government has published manipulated, dishonest inflation statistics below target. Putting on my technical analysis hat, G7 inflation appears to be forming a local bottom in the 2-3% range before heading explosively higher.
Given this chart, orthodox central bankers would not cut interest rates at current levels. This week, however, the Bank of England and the European Central Bank cut interest rates amid above-target inflation. This is very strange. Is it financial turmoil that creates a need for cheaper currencies? it's not true.
Image source: MarsBit
The Bank of England cuts policy rates (yellow) while inflation (white) is above target (red).
Image source: MarsBit
The European Central Bank cuts policy rates (yellow) while inflation (white) is above target (red).
The problem is a weak yen. I believe "bad girl" Yellen has stopped her kabuki act of raising interest rates. Now is the time to start safeguarding the global financial system, led by the United States. If the yen doesn't strengthen, the Chinese will unleash the dragon of yuan depreciation to match the super-cheap yen from Japan, their main export rival. In the process, Treasuries will be sold off, and if that happens, American Pax will be in trouble.
Next step
The G7 will meet in a week. The communiqué issued after the meeting will arouse great interest in the market. Will they announce some kind of coordinated currency or bond market manipulation to strengthen the yen? Or will they remain silent but agree that everyone but the Bank of Japan should start cutting interest rates? Stay concerned!
The big question is whether the Fed will start cutting interest rates closer to the U.S. presidential election in November. Typically, the Fed doesn't change course close to an election. Normally, though, favored presidential candidates don't face potential jail time, so I'm prepared to be flexible with my ideas.
If the Fed cuts rates at its upcoming June meeting and their preferred gauge of inflation rises above target, USD/JPY will be sharply lower, meaning the yen will strengthen. I don't think the Fed is ready to cut rates yet, as slow-moving Joe Biden is being questioned in the polls because of rising prices. Understandably, ordinary Americans are more concerned about whether the vegetables they eat are more expensive than the cognitive abilities of the vegetables they are running for re-election on. To be fair, Trump is also a vegetable, as he likes to watch "Shark Week" while munching on McDonald's fries. I still think a rate cut would be political suicide. My basic view is that the Fed is on hold.
On June 13th, as these bozos sat down to enjoy a sumptuous meal paid for by taxpayers, the Federal Reserve and Bank of Japan had already convened their June policy meetings. As I said before, I don't expect the Fed and the Bank of Japan to change monetary policy. The Bank of England will meet shortly after the G7, and while there is consensus that they will keep policy rates steady, I think they will make a surprising move given the rate cuts from the BoE and ECB. The Bank of England has nothing to lose. The Conservatives will be beaten to a pulp at the next general election, so there is no reason to defy the orders of the former colonial rulers in order to curb inflation.
Helicopter money
June central bank drama, kicked off this week with interest rate cuts from the Bank of England and the European Central Bank, will push cryptocurrencies out of the northern hemisphere summer slump. This is not the base case I expected. I thought the fireworks would start in August, around the time the Fed held its Jackson Hole symposium. That's typically where sudden policy changes are announced heading into the fall.
The trend is clear. Central banks are starting an easing cycle.
Image source: MarsBit
We know how to play this game. We’ve been playing this damn game since 2009, when our savior Satoshi Nakamoto gave us the weapons to defeat the TradFi demon.
Go long Bitcoin, then Shitcoins.
The overall economic situation has changed compared to my baseline. Therefore, my strategy should change accordingly. For the Maelstrom Portfolio project, they asked for my opinion on whether to launch the token now or later. My opinion is: get it fucking launched!
For my excess liquid crypto-synthetic USD cash (aka Ethena's USD, $USDe) it's earning some nice APR, and now it's time to deploy it again into Faith Shitcoins. Of course, I will tell readers what these are after I purchase them. But suffice it to say, the cryptocurrency bull market is awakening and is about to strip the skin and cramps of profligate central bankers.
This article is reprinted with permission from: "MarsBit"
Original author: Arthur Hayes
