From ZeroHedge, April 24:
....Ok, so both the yen and the yuan have cratered, largely due to fundamental schism in monetary policy as both Japan and China are the two major central banks who are currently easing (or in the case of China, mostly pretending to) even as the Fed is about to hike more than 10 times in 2022 according to market estimates. Hardly shocking and to be expected (at least for our readers).
But according to Albert Edwards, who refuses to let this story drop, not only is this divergence about to get much worse, but it will lead to catastrophic market consequences. It's also "the biggest story no-one is talking about."
In a note published late last week under the same title (and available to all professional subscribers), Edwards turns his attention to the yen and yuan, and writes that "surely all of us working in finance realize by now that something is likely to snap in the financial system and probably quite soon."
Why? Because according to the SocGen strategist, "the rapidity of current market moves and the polarisation of the now extreme Fed (hawkish) and BoJ (dovish) policies almost guarantees that outcome.... Maybe the outcome wouldn’t be so ugly if central bankers had not spent recent decades ramping up asset prices to today’s grotesque levels through their monetary incontinence. But they did."
Comparing the monetary policy divergence between the US and Japan to "a car crash in slow motion", Edwards writes that polarization in central bank monetary policy between the US Federal Reserve and Bank of Japan is being stretched ever wider to the point where "at some point soon your life might even flash before you (btw that really does happen. I know because it has happened to me twice, although only one was a vehicle collision)" he writes.
And while nobody died trading FX on Friday (that we know of), that's when the Bank of Japan continued to hold the line on its Yield Curve Control policy capping the 10y JGB yields at 0.25%, and even offered a second round of extremely dovish unlimited 10y bond purchases for a four-day period; at the same time the Fed's "super hawks" were trying to convince the market that a series of 50bp (or even 75bps) Fed Funds hikes were imminent (and judging by the crash in the Dow, they may have succeeded). Between these extremes of behavior, Edwards adds that "what the ECB and PBoC are getting up to is effectively just a sideshow, although still an important one."
It's not just Edwards who focuses on the divergence between the Fed and the BOJ: frequent ZH guest, Larry McDonald, author of the excellent Bear Traps Report writes that the current policy divergence consists of “a) the PBOC (cutting rates, 530bn yuan additional liquidity), b) the ECB winding down net asset purchases this quarter and setting up for a 2H rate hike, c) the BoJ’s aggressive balance sheet expansion, and d) the Fed’s promising 9-12 rate hikes looking out a year with QT aggressively involved.” and concludes “This type of insane monetary policy divergence will clearly break something, that is certain."
Picking up on this dire warning, Edwards notes that one place where something might break soon is in China; he quotes SocGen China expert Wei Yao who believes that the Chinese "economy is now in severe distress and requires aggressive easing. In that context, its strangulation caught between a rising renminbi and a slumping yen, is simply intolerable." This divergence - which SocGen calls the "jaws of exchange rate death" can only go on for so long before something snaps...
Stepping away China's problems for a moment, Edwards turns the spotlight to the Fed, whose "increasingly loud [and hawkish] chest-beating" is "for most commentators the most important financial market development at the moment."....
....MUCH MORE
Earlier this evening: Currencies: "Oh My God, They Killed CNY! You Bastards"
April 20: Capital Markets: "The Yen Bounces after 13-Day Slide and BOJ Defends Yield Cap"
Société Générale's Albert Edwards Is Seeing Possible Chinese Currency Devaluation
That would not be good for Germany. Not at all
On the export front it means Chinese exports getting more competitive simply by virtue of the currency, competition that furthers the slowing of an already slowing German economy....
