Overnight, the yen rose against all its G10 peers because Donald Trump has lost his mind completely and is now firing everyone in sight.
On Thursday evening, the Washington Post reported that a “very stable genius” called “Dennison” is now planning on ridding himself of national security adviser H.R. McMaster who, according to some accounts, once called Trump an “idiot” with “the intelligence of a kindergartner” at a dinner with Oracle CEO Safra Catz.
This kind of thing usually gets reflected in risk appetite one way or another and right now USD/JPY is even more of a natural expression than it would be anyway thanks to a variety of factors not the least of which is that the ongoing land scandal has everyone on edge about Aso and ultimately Abe, which in turn raises questions about the future of Abenomics. Here’s USD/JPY overnight:
The BoJ is in a particularly tough spot here. The U.S. (whether Larry Kudlow admits it or not) has adopted a weak dollar policy by proxy and thanks to the fact that the addition of YCC to the policy mix has led to a steady taper of JGB purchases, Kuroda has a tough time convincing the market that any increase in JGB buying at regular ops is anything other than a temporary concession to calm markets.
That’s why, as Goldman wrote earlier this week, the January 9 trimming of 10-25Y purchases was met with a sustainable dip in USDJPY while the subsequent attempt to effectively negate the hawkish impact of that at the next op was quickly faded.
This is going to become a big deal at some point because it effectively means the BoJ is trapped. They have no way to lean against yen appreciation. The only way out for Japan would be overt currency intervention (a non-starter given Trump, trade, and bowling balls) or else the BoJ buying foreign bonds which would be immediately seen for what it is (a rather thinly-veiled attempt to couch FX intervention in terms of monetary policy efficacy).