“We Ain’t Buyin’ It Anymore”

On Tuesday we got two pieces of evidence to support the contention that the market has lost all faith in the ability of authorities to rescue the world from subpar growth and the kind of universal “Japanification” that threatens to drag the majority of the developed world into the deflationary doldrums.

We realize people have parroted that line ad nauseam; how many times this year have you heard a pundit say “central banks are losing credibility”? But look at what happened today. Here’s Japanese 2s and 10s along with the yen:

So that’s a 100 handle for the USDJPY.

It would be difficult to overstate how significant this is. In the past three trading days we’ve seen the BoJ announce trillions more in asset purchases and Prime Minister Abe announce trillions in stimulus. Leaving aside whether the figures themselves were “underwhelming” (a term which has lost all meaning in today’s print-o-rama), the idea that rates would sell off hard and the yen would rally is the very definition of counterintuitive. Especially after Kuroda walked back the idea that his “review” of BoJ policy would lead him to take his foot off the proverbial gas.

So that’s the first thing. The second thing is this:

I’m sure most of you know what happened just after midnight ET:

RBA CUTS CASH RATE TARGET QUARTER POINT TO 1.50%

Now, you can see what happened on the chart (aussie drops then rallies), but we wanted to give you the sequence of Bloomberg headlines in order that you might enjoy a bit of Tuesday afternoon comic relief:

  • Aussie Drops After RBA Cuts Rates as Most Expected

  • AUD/USD may decline toward July 6 low at 0.7408 if it breaches uptrend line currently at 0.7449, in next few days

Then someone at Citi figured things out: “We wouldn’t be surprised if AUD ended up higher following the RBA’s interest rate cut.”

We wouldn’t either, because the market is now programmed (probably literally in the form of headline scanning algos) to sell any and all central bank news. Cue the next set of headlines:

  • AUD rebounded from a shallow dip seen after the RBA cut rates

  • Mixed signals from the global macroeconomic backdrop continue to keep the markets guessing. The yen and the Aussie reverse knee-jerk reactions as investors digest easing action from policy makers that was accompanied by remarks indicating central banks may take a back seat in efforts to stimulate economies

And then the punchline:

  • AUD/USD has risen within 5 minutes after eight of the last 10 RBA decisions, according to Bloomberg data.

So it did the exact opposite of what it does 80% of the time only to reverse course and do the exact opposite of what it should do given the easing bias because this particular cut was deemed “restrained.”

Let’s just call this what it is: the market simply doesn’t believe in this game anymore. It’s not working and so investors figure the best bet is just to do the exact opposite of whatever central bankers are trying to convey. After all, if they had a clue, global trade wouldn’t look like this:

(Chart: Morgan Stanley)

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