We know the Japanese stimulus program is over 3 times larger than that of the U.S Fed. Now that’s an awful lot of printing/liquidity injection coming at a time when the “U.S contribution” has pretty much run its course.
Yes the bond buying/prop plan continues in the U.S but we all know the stimulus money more or less just sits on the balance sheets of the big banks on Wall Street. The “talk of tapering” would also have put a damper on any “impulsive buying” at this point – as we look forward to an environment where interest rates are on the rise.
As “Japanese Stimulus” is converted to U.S Dollars ( in order to buy assets denominated in USD ) we ‘ve seen “many a day” where USD is UP as well U.S Equities are higher. Makes sense right? Japanese “hot money” converted to USD to buy U.S Equities.
So what’s the “unwind” of that trade should things go to hell in a hand basket?
U.S Equities are first “sold” and USD moves considerably higher, and fast – as cash is raised. Then that “USD” is repatriated home ( converted back to the currency of its origin – in this case Japan) where we would see large flows “back into JPY”!
Gold would also move higher as USD is sold, U.S equities are sold, Japanese Equities are sold.
JPY fly’s out of orbit?
Take it for what it’s worth – I’m thinking out loud….but it doesn’t seem so difficult to get your head around. The big winners on a “risk off” trade being both JPY and Gold.