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Markets Get a Wakeup Call, Chuck Norris-Style

High yielding assets are getting a roundhouse kick to the face, and news appears to just be getting worse as the day continues…

Last night's intervention took USD/JPY as high as 79.52 before subsiding circa 79.19.  It appeared, at least for a moment, that the BOJ was looking to hold the rate at this level.  I was on twitter when this happened and Tim Backshall at sent me the following chart, representing potential significance of this level.  Even after today's unwinding, we are still within the general range, but only at the base.  As I write, CNY/JPY is held around 12.28.

The entirety of the day's activity has continued intervention written all over it. After the initial thrust, levels of heavy demand came in as follows:

79.19, 78.79, 78.22 and the range around the low 77.80's.  Low 20's and 80's in all these cases.

USD/JPY  is currently sticking above 77.93, or right around 38.2% of last night's total range (at 78.00).

The last time the BOJ came in with a vengeance, you might recall, was a coordinated effort with other countries.  These interventions almost always end up unwinding at some point, though the short term effects can be very difficult to judge.  In the case of the last intervention, USD/JPY continued heading higher, essentially doubling the size of the initial effort.

One thing we know is that the SNB has certainly set the tone in regards to what an intervention should look like – whether or not the BOJ will follow suit is yet to be seen.

MF Global filing for bankruptcy sent everyone right back to 2008.  Strings of devastating news like this sent the market into a whirlwind of tumbling confidence, putting equities and high yielding assets on a one way street into the ground….. Confidence tumbled and the effect played out exactly the same today.  World equity markets got punished, and finding buyers has been every bit difficult.

Of course, we sit back and think: “If this can happen to Man Financial, what else is possible? Is this just the beginning of more to come?” Whether it is or isn't, the market has already received a strong shot of fear.  That much we can trade with.

This isn't going to leave the headlines, either.  People are going to be discussing it all week, so don't expect hopeful news reports.

Rate cut speculation is now kicking in with EUR/USD and the “revenge trade” from last week's move higher is in full effect.  On Friday we had buzz of a handful of banks seeking as much as a 50bp cut to be declared at Thursday's meeting, and the “threat” seems to be spreading across the market. Combine that with the BOJ buying a boatload of US dollars and fear from other events taking higher yielding assets to the floor today: the Euro fell over, drunk with false hope.

As I write headlines are dropping in from Greece….things are not rosy.  Papandreou's arms are up in the air and the Euro is tanking.  I am starting to think that the market is actually responding in a logical manner today.

Goldman issued a short on AUD/JPY based on the expectation that the RBA will cut by 25bps at today's meeting.  This was released shortly after the yen intervention, and while we sit and wonder why the hell they would do something like this, they offered the following explanation:

“The impact of Japan’s last intervention on $/JPY (Aug 4) just ahead of the FOMC meeting at the time (Aug 9) was quickly unwound on a dovish Fed statement. Finally, one of the main FX themes over the past months of rapidly varying risk appetite has been that current account surplus currencies have outperformed current account deficit ones. Being short AUD/JPY also fits into our perception that this theme has further to play out.”

When it comes to their currency trade recommendations, Goldman plays events – before and after, almost all the time.  To hear something like this get released doesn't come as much surprise.

It is also the final day in October and a swell of rumors regarding month-end activity has everyone on edge.  GBP/USD apparently spiked based on some end of month sales via EUR/GBP, flipping it from the mid 1.6000's up to 1.6165.  A very similar situation played out on the last day of September with approximately the same daily range.

Ultimately, its ugly, and it's only the first day of the week.  Rate announcements and payrolls flood the calendar, and it's going to be a fun one. Use your head and don't get caught in the roundhouse.