Newbie macroeconomic question to anyone knowledgeable

P

Pluralsight

I read this article today after a friend linked it to me: http://www.zerohedge.com/news/2017-04-17/were-all-yen-traders-now#comments

"
The Japanese exchange rate is being influenced by massive distortions with their unprecedented quantitative easing programs. And that’s the rub. The Yen is not ‘tracking’ but instead ‘creating’ these moves in the U.S. capital markets.

The Bank of Japan’s quantitative easing program is without precedent in the developed economic world. It is easy to forget the magnitude of their purchases. To remind you, here is a chart of the Fed, ECB and BoJ’s balance sheet as a percent of GDP:"


What does that mean? That the japanese government is buying or selling US bonds? My little understanding is that when a country does quantitative easing, it buys its own country's bonds. So the japanese would buy japanese bonds, not US bonds, in order to stimulate their economy. Where does the similarity of the jpy to the 5 year US bond come from?
 
It's a feedback loop of correlations. Everything works in relation to the USD. USD relative value is predicated on implied future policy shifts of FOMC. The data or events in the world steer the implied value of USD relative to other macro markets. If FOMC policy is viewed to be 'too' tight to what the economy can handle. The yield curve flattens or inverts. If FOMC policy is viewed 'too' dovish relative to what the economy is doing. Yield curve steepens. If short term rates are raised too quickly it implies that relatively soon the chances are the rate hikes are aborted or reversed. So USD gets hit relative to gold, gold value increases where flight to safety takes place. Some choose bonds instead of gold.


If FOMC is not raising rates, even though economy needs it. Than inflationary pressures build, FOMC plays catch-up, bonds get hit along with gold initially. Only at later stages of a inflationary cycle will the correlation with Gold break. Gold will rise while bonds get decimated. So if USD rises Yen drops, USD becomes a proxy for health of the Global economy since US is a major consumption engine. If world economic health is poor the value of USD continues to drop which implies further Yen creation which is used to purchase risk assets to prevent full deflationary spiral down. Risk assets being anything that can support return on money to filter into economy. Without blatantly handing out billions of dollars to the public, they are handing it out through 'wealth effect'.. bonds, gold, equities are purchased with the endless supply of Yen. If economic health picks up, it means USD value goes up, and everything relative to it drops. Since cheap money or carry isn't their to go into return on risk assets.

Ultimately it's a feedback loop of correlations. Only temporal ordeflow that contradicts the correlation can break it over time.

Economic traction hasn't taken place yet. That is why this Trumpflation was a false start. Bonds and Gold rising while USD collapses. Equities, bonds, gold will continue to get bid up.

Chris
 
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The only thing that can save us is growth, and for that we need a growing consuming population. Better get your immigrants while they are still available, because we just don't have time to screw around anymore.
 
Spectre2007 said:
It's a feedback loop of correlations. Everything works in relation to the USD. USD relative value is predicated on implied future policy shifts of FOMC. The data or events in the world steer the implied value of USD relative to other macro markets. If FOMC policy is viewed to be 'too' tight to what the economy can handle. The yield curve flattens or inverts. If FOMC policy is viewed 'too' dovish relative to what the economy is doing. Yield curve steepens. If short term rates are raised too quickly it implies that relatively soon the chances are the rate hikes are aborted or reversed. So USD gets hit relative to gold, gold value increases where flight to safety takes place. Some choose bonds instead of gold.


If FOMC is not raising rates, even though economy needs it. Than inflationary pressures build, FOMC plays catch-up, bonds get hit along with gold initially. Only at later stages of a inflationary cycle will the correlation with Gold break. Gold will rise while bonds get decimated. So if USD rises Yen drops, USD becomes a proxy for health of the Global economy since US is a major consumption engine. If world economic health is poor the value of USD continues to drop which implies further Yen creation which is used to purchase risk assets to prevent full deflationary spiral down. Risk assets being anything that can support return on money to filter into economy. Without blatantly handing out billions of dollars to the public, they are handing it out through 'wealth effect'.. bonds, gold, equities are purchased with the endless supply of Yen. If economic health picks up, it means USD value goes up, and everything relative to it drops. Since cheap money or carry isn't their to go into return on risk assets.

Ultimately it's a feedback loop of correlations. Only temporal ordeflow that contradicts the correlation can break it over time.

Economic traction hasn't taken place yet. That is why this Trumpflation was a false start. Bonds and Gold rising while USD collapses. Equities, bonds, gold will continue to get bid up.

Chris
More...


First of all thank you for the reply. As the subject of macroeconomics is new to me, and it is a tough subject, I had trouble understanding your answer. I think you are basically saying that it all is tied to the dollar. However the article I linked (not saying they are right or wrong) seem to say that there is a very strong correlation between the JPY and the 5 year yield, which has no fundamental explanation.

And right after that they mention the QE program Japan has been following, so I assumed they meant that the similarity of the JPY and the 5 year US yield is because of that QE program, but I couldn't understand how, meaning who does what.
 
Spectre2007 said:
It's a feedback loop of correlations. Everything works in relation to the USD. USD relative value is predicated on implied future policy shifts of FOMC. The data or events in the world steer the implied value of USD relative to other macro markets. If FOMC policy is viewed to be 'too' tight to what the economy can handle. The yield curve flattens or inverts. If FOMC policy is viewed 'too' dovish relative to what the economy is doing. Yield curve steepens. If short term rates are raised too quickly it implies that relatively soon the chances are the rate hikes are aborted or reversed. So USD gets hit relative to gold, gold value increases where flight to safety takes place. Some choose bonds instead of gold.


If FOMC is not raising rates, even though economy needs it. Than inflationary pressures build, FOMC plays catch-up, bonds get hit along with gold initially. Only at later stages of a inflationary cycle will the correlation with Gold break. Gold will rise while bonds get decimated. So if USD rises Yen drops, USD becomes a proxy for health of the Global economy since US is a major consumption engine. If world economic health is poor the value of USD continues to drop which implies further Yen creation which is used to purchase risk assets to prevent full deflationary spiral down. Risk assets being anything that can support return on money to filter into economy. Without blatantly handing out billions of dollars to the public, they are handing it out through 'wealth effect'.. bonds, gold, equities are purchased with the endless supply of Yen. If economic health picks up, it means USD value goes up, and everything relative to it drops. Since cheap money or carry isn't their to go into return on risk assets.

Ultimately it's a feedback loop of correlations. Only temporal ordeflow that contradicts the correlation can break it over time.

Economic traction hasn't taken place yet. That is why this Trumpflation was a false start. Bonds and Gold rising while USD collapses. Equities, bonds, gold will continue to get bid up.

Chris
More...


Are you saying that basically the Fed policy might actually be a little tight now (seen with the lower than expected inflation numbers), and so the yield curve will start to flatten, as the short term (5 year) yield drops in price?
 
Market participants price instruments based on existing correlations and implied future correlations. USD/YEN exchange rate is barometer of global economic health. As the exchange rate goes up so will the 5 year rate or other rates. The yield curve shifts up as the global economic health increases. The term structure can change, based on perceptions of accuracy, the near term shifts in relation to actual economic health. The economy holds back the rest of the term structure if the FOMC is not inline with the true economic conditions.

If they raise 2-3 times this year yes. If they stay put, no.. economy can only handle 1 hike per year.
 
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Spectre2007 said:
Market participants price instruments based on existing correlations and implied future correlations. USD/YEN exchange rate is barometer of global economic health. As the exchange rate goes up so will the 5 year rate or other rates. The yield curve shifts up as the global economic health increases. The term structure can change, based on perceptions of accuracy, the near term shifts in relation to actual economic health. The economy holds back the rest of the term structure if the FOMC is not inline with the true economic conditions.

If they raise 2-3 times this year yes. If they stay put, no.. economy can only handle 1 hike per year.
More...


Ok I think I understood, but have one problem with this: The article is basically showing the JPY/USD following the 5 year rate so closely, not the USD/JPY. Which is why I think I'm missing something.
 
Pluralsight said:
Ok I think I understood, but have one problem with this: The article is basically showing the JPY/USD following the 5 year rate so closely, not the USD/JPY. Which is why I think I'm missing something.
More...

No it's mislabeled .. axis on right shows usd/jpy
 
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