June 2013 - Page 3 of 3 - Forex Trading With Kong

The USD Debasement Trade Is Just Getting Started

Currency Debasement Mechanics: Why Commodities Are the Ultimate Hedge

Here’s what every forex trader needs to understand about currency debasement and commodity prices. When central banks flood the system with liquidity, they’re essentially diluting the purchasing power of their currency. The USD has been on a printing spree that would make Weimar Germany blush. More dollars chasing the same amount of real assets means higher prices for those assets. Period. This isn’t rocket science – it’s basic monetary theory that’s been proven countless times throughout history.

Look at the DXY chart and tell me you don’t see a currency in serious trouble. The Dollar Index has been painting lower highs and lower lows, and the fundamental backdrop supports continued weakness. Meanwhile, commodities are priced in USD globally. When the dollar weakens, it takes more dollars to buy the same barrel of oil, bushel of wheat, or ounce of gold. This inverse relationship is forex trading 101, yet most traders are completely missing this massive structural shift.

The Fed’s Impossible Position: Inflation vs Economic Growth

The Federal Reserve is trapped in a corner of their own making. They can’t raise rates meaningfully without crushing an economy built on cheap money and massive debt loads. Corporate America has gorged itself on low-interest debt for over a decade. Housing markets are leveraged to the hilt. The government’s interest payments alone would become astronomical with normalized rates. So what’s their only option? Keep the printing press running and accept higher inflation.

This creates a perfect storm for commodity prices. The Fed’s dovish stance keeps real interest rates negative, making yield-bearing assets less attractive compared to hard assets. Smart money is already rotating into commodities, precious metals, and commodity-linked currencies. The Australian Dollar, Canadian Dollar, and Norwegian Krone are all benefiting from this rotation. These commodity currencies are outperforming the USD, and this trend has serious legs.

Global Currency Wars: The Race to the Bottom Accelerates

It’s not just the US debasing its currency. The European Central Bank, Bank of Japan, and Bank of England are all engaged in competitive devaluation. But here’s the key difference: the USD still holds reserve currency status, meaning global commodities are priced in dollars. When the world’s reserve currency weakens, it creates massive dislocations in global commodity markets.

China knows this game better than anyone. They’ve been stockpiling commodities for years, understanding that currency debasement is inevitable. Beijing is positioning the Yuan as an alternative reserve currency while accumulating real assets. The writing is on the wall for anyone willing to read it. The USD’s dominance is being challenged, and commodities are the beneficiaries of this monetary regime change.

Portfolio Positioning: Beyond Traditional Forex Pairs

Stop trading USD/EUR and USD/GBP like it’s 2015. The real money is being made in commodity-linked plays and hard asset proxies. The Canadian Dollar benefits from oil strength. The Australian Dollar moves with iron ore and gold. The South African Rand correlates with precious metals. These aren’t just currency trades – they’re macro positioning plays that capture the broader commodity supercycle.

Agricultural futures are screaming higher, energy complex is building a base, and precious metals are breaking out of multi-year consolidation patterns. This isn’t coincidence – it’s the inevitable result of monetary policy gone wild. Traders focusing solely on traditional forex pairs are missing the biggest wealth transfer in decades.

The smart money isn’t debating whether commodities will rise – they’re positioning for how high and how fast. Food security, energy independence, and precious metals as monetary alternatives aren’t fringe ideas anymore. They’re mainstream investment themes driven by irresponsible fiscal and monetary policy. The commodity supercycle is here, and it’s being fueled by currency debasement on a scale never seen before. Position accordingly.

“The following is taken largely from the newletter of John Mauldin”

After the collapse of what might still be the largest economic bubble in history, in 1989, Japan is still mired in a 24-year non-recovery. Nominal GDP in 2011 was almost exactly what it was 20 years earlier, in 1991. You can find other ways to measure nominal GDP which indicate limited growth; but compared to the US and China, nominal growth in Japan has been virtually non existent.

Japan’s gross debt to GDP ratio is expected to top 245 per cent this year, according to estimates by the International Monetary Fund – which is considered to be “ridiculously high”.

They cannot continue to grow their debt at the current rate. There is a limit. No one knows for sure what that is, but it is getting closer. And they know it. So they have to get their fiscal deficit below the growth rate of nominal GDP.

If JGB (Japanese Government Bonds) interest rates rise 2% in Japan, then the government must pay almost 80% of its revenues (as currently received) just to cover the interest on its debt. Even a 1% rise would be fiscally devastating.

The Abe government plans to raise taxes. Japan’s current sales tax is 5%, due to increase to 8% next year and 10% by 2015 with hopes of generating further revenues , but this will also hurt consumer spending. So round and round it goes.

The government of Japan has no choice. Prime Minister Shinzo Abe’s radical experiment with macroeconomic stimulus will create a debt and monetary overhang so huge that it may just bankrupt the financial system and quite possibly trigger hyper-inflation, and at this point – there is no turning back.

I’m watching this closely as my theory that the “EU Zone” would be our catalyst for “global fireworks ahead” may very well be replaced by Japan as this is developing extremely quickly.

I believe the “easy money” short JPY is now gone, and am currently positioned “long JPY”.

Nice call Kong! The Nikkei is down a wopping -2,500 points since your post : https://forexkong.com/2013/05/25/nikkei-20-year-chart-rejection/

The JPY Reversal: Why Smart Money is Positioning Long

Technical Confluence Supporting the Yen’s Bottom

The JPY’s structural reversal isn’t just fundamental—it’s technically screaming at us. Look at USD/JPY hitting multi-decade resistance near 125.00, a level that’s rejected price action consistently since the Plaza Accord dynamics shifted global currency flows. The weekly RSI showed extreme overbought conditions for months, while the monthly chart displayed clear divergence between price and momentum. When you combine this with the BOJ’s inevitable policy pivot, you get a recipe for massive unwinding of carry trades that have dominated flows for years.

Smart money has been quietly accumulating JPY across multiple pairs. EUR/JPY’s rejection at 140.00 was particularly telling—European banks have been massive JPY shorts, using the yen as funding currency for their peripheral bond plays. That trade is now toxic. GBP/JPY’s failure to hold above 170.00 confirms the broader theme. These aren’t random technical levels—they’re structural points where decades of central bank intervention and carry trade flows converge.

The Carry Trade Unwind Accelerates

Here’s what most retail traders miss: the JPY carry trade isn’t just about Japan. It’s the foundation of global risk appetite. When hedge funds and institutions borrowed yen at near-zero rates to buy everything from Australian bonds to emerging market equities, they created a web of interconnected positions that dwarf Japan’s domestic economy. The unwind of these positions creates forced buying of JPY regardless of Japan’s internal economic situation.

AUD/JPY dropping below 90.00 signals the commodity carry trade is dead. NZD/JPY’s collapse through 85.00 confirms it. These currency pairs served as proxies for global growth expectations, funded by cheap yen. Now that growth is slowing globally while Japan’s relative position improves through lower energy imports and manufacturing reshoring, the entire thesis reverses. The yen becomes a haven again, not just a funding currency.

Policy Divergence Creates Opportunity

The Federal Reserve’s aggressive tightening cycle creates an interesting dynamic with BOJ policy. While the Fed fights inflation with rate hikes, Japan’s inflation remains structurally low due to demographics and productivity gains. This divergence typically favors the dollar, but we’re reaching limits. USD/JPY above 140.00 triggers intervention from the MOF—they’ve made this crystal clear. More importantly, real interest rate differentials are compressing as US inflation stays elevated while Japanese inflation moderates.

Central bank intervention isn’t just about verbal threats anymore. Japan’s foreign exchange reserves are massive, and they’re prepared to use them. The MOF’s recent operations weren’t just warning shots—they were testing market depth and establishing price levels where they’ll defend the yen aggressively. When a central bank with unlimited domestic currency printing capability decides to defend a level, betting against them becomes extremely expensive.

Positioning for the Long JPY Trade

The mechanics of this trade require precision. Simply buying JPY against the dollar might work, but the real money is in cross-currency opportunities. EUR/JPY offers excellent risk-reward as the European Central Bank faces its own crisis with peripheral bond spreads widening and energy costs crushing competitiveness. The European economy’s dependence on Russian energy makes it structurally weaker than Japan’s pivot toward energy independence.

GBP/JPY presents another compelling short opportunity. The UK’s current account deficit and political instability contrast sharply with Japan’s improving external balance and stable governance. More importantly, the Bank of England’s hiking cycle is approaching its terminal rate while the BOJ maintains policy flexibility. This creates a convergence trade that could deliver significant returns as rate differentials compress.

Risk management remains crucial. Use JPY strength against commodity currencies like AUD and CAD as hedge positions. These pairs offer better technical entry points and align with the broader theme of carry trade unwinding. The key is patience—this reversal took years to develop and won’t resolve in weeks. Position sizing should reflect the long-term nature of this structural shift while maintaining flexibility for short-term volatility that intervention operations will inevitably create.

Month: June 2013

Commodities Moving Up – USD Down