ZARMAGEDDON: Here's The South African Currency Collapse Chart That Everyone Is Talking About

The talk of the financial world right now is the big decline in emerging market currencies (which we wrote about this morning) and the collapse of the South African Rand (which Matthew Boesler wrote about yesterday).

The Rand (which has the three-letter code ZAR, hence the headline) has been getting whooped by a perfect storm.

There's the dollar strength, the commodity weakness, the bad internal South African economy, and a big miners strike that's ongoing. Everything that could go wrong is.

Via XE.com, here's a one-month chart, showing how the dollar has soared against the Rand.

And here's the intraday chart, showing the big surge in the dollar against the rand just today.

As you can see it was a bit worse earlier in the day.

XE.com

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HAJIME KITANO: What's Happening Now With The Yen Has Happened Every 7 Years Since 1973

When currency markets close for the weekend this afternoon, the Japanese yen will have slid against the U.S. dollar for the last eight months in a row.

Since hitting a 2012 low of ¥77.12 to the dollar on September 13, the yen has devalued all the way to current levels around ¥101.00.

Because the Japanese government has not yet taken up structural programs in order to boost competitiveness and potential growth in the Japanese economy, the dollar-yen exchange rate has been the primary yardstick for the vaunted "Abenomics" program of fiscal and monetary stimulus that has been underway in Japan since December, when former Prime Minister Shinzo Abe was re-elected to office, six years after his resignation from the post in 2007.

Morgan Stanley Japan equity strategist Hajime Kitano says not to read too much into the yen's recent decline in terms of ushering in "structural change" to the Japanese economy.

In a note to clients, Kitano points out that long yen declines like this actually happen about every seven years:

Since the switch to the system of floating exchange rates in 1973, the dollar/yen rate has risen for at least seven consecutive months on six occasions including the present. It is a phenomenon that occurs once every seven years. We thus think it is too early to judge whether eight consecutive months of yen depreciation would reflect ‘structural change,’ as suggested by the Nikkei.

Exhibit 1 shows the average dollar/yen rate in the 12 months before and after the month when these record-duration phases of yen depreciation ended. After an approximately 6% decline over 5–6 months, the dollar/yen rate starts to rise again. This is of course only the average pattern, with the year following the end of record-duration phases seeing a further 13% rise for the 1996 occasion, and a 14% decline in the case of 1990. Indeed, it is only with the benefit of hindsight that we know when a record-setting phase of yen depreciation ends.

Here's Exhibit 1:

Bloomberg, Morgan Stanley Research

Aside from historical patterns, though, Kitano cites another reason to be skeptical: the relationship between yen-selling interventions by the Japanese government and the value of the currency.

The intervention in August and November 2011 had a total scale of ¥13.6 trillion," says Kitano. "We think that this certainly could have affected the dollar/yen rate after a lag."

The chart below shows the relationship between the 12-month average of yen-selling intervention value as a percentage of trade volume and the year-over-year change in the dollar-yen exchange rate.

Bloomberg, Morgan Stanley Research

"If this supposition is correct, then we think that it eliminates one justification for the structural argument that 'this time is different'," says Kitano. "Experience tells us that when the mass media bring up a 'structural argument,' it is advisable to doubt the market’s sustainability."

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Nikkei Futures Continue To Get Crushed

The weakness in Japanese markets is pretty unreal.

After being a can't lose market up until a week ago, now nothing can stop the bleeding.

After a mediocre up day during normal Nikkei trading, futures trading has been urgly, losing about 2.5%.

Via FinViz, check out how bad it's been this morning.

(HT: @finansakrobat)

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The 'Canaries In The Bond-Mine' Look Terrible

Sam Ro | May 31, 2013, 12:26 PM | 3,194 | In a recent note to clients, Bank of America Merrill Lynch's Michael Hartnett warned that the risks of a bond market crash were high.

This comes in the wake of the Fed Chairman Ben Bernanke suggesting that the Fed could soon taper its quantitative easing program — the Fed's effort to stimulate the economy by buying bonds to lower interest rates.  In theory, the taper would put pressure on the bond markets because a major buyer (i.e. the Fed) scales back.

Hartnett notes that the other areas of the financial markets are getting slammed by taper fears and they are signaling worse times are ahead for bonds

Now the bad news. While the turn in housing should be welcomed by Main Street, the recent melt-up in stock prices in the US and Japan, in combination with surging home prices (annualizing gains of 16% in Q1), threatens to remove the liquidity “punch bowl”. And following the decline in a number of safe haven asset prices, we now see a host of “canaries in the bond-mine” indicating that markets are getting very nervous about QE tapering and the prospect of much higher bond yields. In recent weeks, mortgages, REITs, utility stocks as well as lumber prices have all tumbled (Chart).

Check out Hartnett's ugly chart.

Bank of America Merrill Lynch

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The Utica Is Quite ‘Gassy’ … And That’s OK

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Treasuries Are Taking A Big Hit This Morning

The biggest story of the week in global markets has been the swift rise in U.S. Treasury yields as investors have unloaded their bond holdings.

Earlier this week, the market saw its highest daily trading volume ever, and yields hit their highest levels in over a year.

This morning, bonds are selling off again, and the yield on the 10-year Treasury bond has risen 5 basis points to 2.16%, pushing toward a new high, as the chart below illustrates.

Business Insider/Matthew Boesler, data from Bloomberg

The chart below shows price action in 10-year Treasury futures this morning. They really started selling off when the stock market opened at 9:30 AM ET, and continued to tumble after positive surprises from the Chicago PMI and University of Michigan consumer confidence releases at 9:45 and 9:55, respectively.

Now, they are trading down 0.4% on the day.

Thinkorswim

Lately, one of the themes in the Treasury market has been increased sensitivity to economic data releases.

Because the Federal Reserve has bought up so much of the bond market through quantitative easing programs designed to provide monetary stimulus in recent years, the effects of weekly and monthly changes in economic data on bond prices have been diminished.

However, since the Fed introduced the "Evans rule" at its December monetary policy meeting, which ties the outlook for when the central bank will begin tightening stimulus directly to economic data benchmarks, bond prices have become more reactive to the data.

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