Gold and the dollar were, up while currencies like the Euro depreciated against others on concern that the Fed's actions will not be enough to support growth. Income and spending numbers released early in the day showed that U.S. consumers are spending from their savings which doesn't bode well for the recovery. On the whole, today was not heavy on data which helped traders focus on interpreting and analyzing last week's developments.

Most Asian currencies were higher against the USD today in response to the disappointing "emergency" action of the BoJ. Stock markets were mixed, as the Nikkei fell, while the Hang Seng was up.

Japan intervention talk comes to nothing; "bold" action restricted to stimulus

Precisely as anticipated on this page and elsewhere last week, the decisive and bold action threatened by Japanese officials has been discovered to be nothing but an empty bluff. In a move that borders on the ridiculous, the BoJ has decided, after what was touted as an "emergency" meeting, to announce a secondary 6-month $10 trillion yen fixed-rate liquidity facility in addition to the existing three-month 0.1 percent loans introduced in December. One can imagine the discussion between officials as they discussed their options. It is obvious that the PM was reminded in no uncertain terms of the futility of trying to intervene in the FX market without support from other central banks, how unlikely this support was to materialize in the face of well-understood U.S. opposition, and how limited Japan's options were in combating the USDJPY trend otherwise. In his turn, we suspect that the PM was unwilling to leave the meeting without annoucing something tangible, and the compromise was this feeble loan program that has not managed to raise a single feather in the FX market so far. Indeed, the Yen rose a short time after the announcement of "bold" action.Further, data on positioning of large speculators shows that Yen longs were continuing to be built up last week in an indication of how incredulous the market already is against the daily threats of intervention (on the other hand, the longs are high by historical standards, so a natural reversal may come in soon, helping the Japanese relax a little). The threats seem to generate the opposite of the intended effect, creating an image of a government that is so powerless that the only thing that it can spend is its prestige and credibility.

The shady Mr. Ozawa's challenge may at some point for the PM to take the futile, and unconstructive path of a unilateral intervention. Even this appears to be unlikely, but it can't be ruled out because of survival issues faced by the PM. The yen story will no doubt continue, and we'll update you as soon as events progress into the autumn.

CNY continues its series higher-than-anticipated USDCNY fixes

The PBOC fixed the CNY at 6.8025 vs. 6.8001 on Friday, futher extending the uptrend. The latest high maintains the currency at its mid-June levels, and we can talk of the reintroduction of the peg during that period.

Upon news that the USDCNY peg was broken, we had commented on these pages about the absurdity of the notion that any regime change had taken place, noting that in the context of controlled appreciation, the PBOC would be more than ready and willing to revert to the peg without even making a statement. The Chinese manage their currency and their economy in a highly pragmatic manner, and are not beholden to slogans or mottos. The declaration and the qualifications that were announced by the PBOC on June 21^st were not an indication of anything more than a temporary readjustment to the exchange rate policy, which had been maintained as a fix up until then. And as we now observe, the bank did not hesitate to delay its appreciation plan as soon as it became clear that the economic situation was more fluid than they desired.

There is no question that the Chinese are aware of the necessity of revaluing the Yuan, but to undertake drastic action they will have to be shown the consequences of inaction clearly. Certain tariffs recently imposed in the U.S. goes some way towards this purpose, but stronger action is necessary if the Chinese are made to revalue on a cost/benefit assessment. As far as we are concerned, the Yuan issue is one of the two main features of this phase of the economic downturn along with the future of the Euro, and we'll continue to focus on developments here.

Finally, the decision by the PBOC to allow exporters to deposit some of their foreign currency income overseas, without converting it to the Renminbi, is of note. It shows once again the tricks enjoyed by the PBOC directed at resolving sterilization issues in the domestic market while refusing to support sustained and meaningful appreciation. The small amounts channelled out of the country are too small to ease domestic problems, but big enough, probably, to create bubbles and imbalances in other smaller nations if export cash is redirected there (which will happen anyway through indirect channels even if the proceeds are invested in U.S. Treasuries).

Eurozone August economic sentiment better than expected

As with most other recent releases from Europe, confidence numbers were robust, coming at 101. 8 vs. 101.3 in the previous month. Business sentiment was weaker, while inflation expectations were unchanged. The first half of this year has not been a bad period for Europe, so we are not surprised to see some improvement in confidence. On the other hand, various indicators of growth and confidence appear to be plateauing out, and with background issues promising to make the second half of the year a different experience for the continent, we suspect that European bullishness will not be long-lasting.

Many are still digesting the food-for-thought supplied by the Fed chairman at Jackson Hole, but we don't think that the Fed has a lot of relevance as it has already done just about anything that it can do. The Japanese experience shows that the more-of-the-same approach of supplying ever increasing amounts of cheap money is exponentially less effective with the passage of time, and there is no reason to think that the experience here will be very different. The basis of the chairman's optimism about being able to revive economic activity was the idea that effective stimulus, delivered early, would prevent the kind of deterioration suffered during the Great Depression. In other words, it either works early, or it doesn't inspire much hope of working at all. It is true that the Fed has prevented a general meltdown, but there is barely any signal that it has managed to prevent the shift in psychology that is the root of all long-lasting economic downturns. That is why we remain highly skeptical about its relevancy for the foreseeable future.