The PBoC Pumps the market with $255 bn in liquidity

I'm happy to see so many emails tonight with members focussing on the Yen as that's where the real indications are, even though in this case (despite the BOJ 2-day meeting just starting) it's actually a move China made that has the SPX E-minin futures up 10 points from Friday's 4 pm print.

We have been following the tight liquidity conditions and blow out in money markets in China, similar to the US 2008, this has been a big deal because they are caught between a rock and a hard place with inflation, yet the lack of credit growth and of course interbank liquidity lock ups.

You may recall that the market did not respond kindly to 3 consecutive skipped, regularly schedule Tuesday/Thursday reverse repos. In like, but opposite manner, the PBoC injected $255 bn CNY via a $75bn 7-day reverse repo and a $180 bn 21-day reverse repo for an injection of $255 bn CNY.

This all looks great tonight, but is surely a thin veneer of subterfuge that most people don't understand, China has REAL problems in the inter-bank market. An injection this big (the biggest since last February) would not be arbitrarily thrown out there like the F_E_D's "Throw it against the wall and see what sticks " mentality, the PBoC has been very surgical in their injections or lack of injections and even several liquidity draining events over the last 3 or 4 months, so I'd say that the initial knee jerk reaction to a lot of money sloshing around is really not the important aspect of what happened tonight (Tuesday, a regularly scheduled open market operations day).

As far as what we have right now because that's what matters right now...It seems like momentum is fading a bit, but as always it's a long night and Europe still has to open.

To me, it looks a bit like someone knew something just before the operation. I have to stick with 1 min charts for now, the morning may be a different story, the reason being is it's a new fundamental (surprise) event so we have to let it price in and let the underlying trade react. My gut feeling is the initial exuberance will give way to the question, "Why so big? What's wrong?" That may actually be taking place right now.

 ES 1 min looks like it had some early accumulation before the PBoC event. As we move along there's an obvious loss in price momentum, but also a range and that's where we see a lot of strong underlying trade which happens to be starting to lead negative in that range, but this is by far the least damning chart.

 The Carry Cross, USD/JPY DEFINITELY looks like someone knew something with a huge leading positive divegrence in a FLAT RANGE as mentioned above, since another loss of momentum/range and a relative negative divegrence, again a 1 min chart which isn't my favorite for overnight, but we have to start where the event started until the 5 min charts catch up and/or the divergences migrate to longer term charts.

 As for the 30 min USD/JPY chart, the only thing I see that may cause some additional movement is if the $104.91 level is taken out as it represents part of a series of lower highs/lower lows since the top at the New Year so there would likely be some technical trading if that level were taken out.


 The 1 min EUR/JPY (by the way, BoFA downgraded the EUR/USD tonight as you'll notice the EUR is looking weaker tonight). Again, another positive divegrence before the event, this one with a head fake move below the yellow line and it did what it is suppose to with immediate shift to the upside with momentum. Also once again, another trading range developing in the carry cross and another leading negative divegrence forming.

Going right to the source, the Yen single currency futures, 1 min, you can see there's not only a loss of momentum, but what looks like a small reversal process underway with a positive divegrence in that process, so it may be this is being seen as a good opportunity to cover/close some carry trades at advantageous price levels with the Yen down here, that's my guess as to what we are seeing right now.

 The Yen's 5 min chart shows a leading negative divergence (red box) and that same little rounding bottom from above with a positive divergence just migrating from the 1 min to the 5 min so if it keeps it up, this divergence should look pretty strong in the morning if it hasn't already moved price.

 The longer term 15 min Yen chart is largely unaffected, the positive divegrence at the lows is just too big and the leading positive divergences following it are showing it has stayed in good shape, yes it's reacting a bit to tonight, but the probabilities are still a higher Yen, lower carry crosses and index futures.


I think the MOST interesting chart is the Nikkei 225 futures, note the strong leading positive (1 min) divergence on the new open and price following that, then a just as strong leading negative divegrence now as the NKD hits its highs, interesting because again it looks like someone knew something before hand (a leak) and as of now, it looks like the knee jerk reaction to all that liquidity sloshing around may be giving way to the question, "Why?" which will likely not be a pretty answer.

Other than that, not much has changed since Friday, I still think there's a very good chance we have aCrazy Ivan shakeout going on in the averages as I showed Friday, that doesn't end well. I wonder what we'd be looking at if the PBoC didn't surprise the market with an 11 month high reverse repo injection?

As far as my schedule, just to let you know, I have a Pre-Op Dr.'s appointment at 1 pm tomorrow, it was supposed to be last Tuesday, but the market was so busy I cancelled it, I have to make this one, but I'll have my laptop with me and it's just a quick appointment to give me the all clear for anesthesia for that skin cancer operation I told you about. That operation will be the 28th of this month. Other than that, I'm here and as I said, tomorrow I'll have my lap top with me so it shouldn't be much down time, but I do need to get this taken care of being so close to my eye.

OK, we'll see what things look like in the morning, I think they'll look a bit different.

See you in a few hours.