We're setting up to see some pretty big volatility in the upcoming week... Towards the end of last week, we really witnessed the yen begin to lose steam... And, many traders are struggling to find a reason supporting cross currency strength... Here's the thing, really, there's not too much "flight to safety" reasoning behind the yen today, nor was there yesterday. In fact, the "flight to safety" reasoning is really more psychological than anything else.
Here's what you WON'T read anywhere else but here... While the rest of the world is trying to figure out why the yen has come under weakness, the reasoning is truly the potential deterioration in the credit quality of U.S. Treasuries.
See, it is a fundamental principal in economics that anytime you increase the money supply, inflation kicks in. Right now, the market is pricing in deflation. But there's more to the story. Three weeks ago, in the U.S. Treasuries $30 billion auction, there were no buyers of U.S. debt. Mysteriously an anonymous bid stepped in to save the day...
Just read this excerpt from James West, "Last Thursday, an $30 billion auction in five-year notes failed to stir the interest of traditional primary dealers. The auction itself was saved by an anonymous "indirect" bid.
Buyers are discouraged by the prospect of what is expected to amount to $2 trillion total issuance for the full year of 2009. The further out the maturities on notes, the more bearish the sentiment towards them. The only way to entice buyers is through the increase in yields."
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