The $3 Trillion Reserves Faultline Is About To Be Crossed

$3 trillion was the level that triggered the regional banking crisis of 2023. What will it trigger this time? Something worse, now doubt.

Summary

• The Bank of Japan's recent intervention in the yen exchange rate has cost $70 billion so far, and probably another $30B today.

• The US labor market is stalling, with hiring and wage growth slowing more than expected in April.

• The US economy needs another injection of dollars as we head towards the critical $3 trillion in bank reserves.

• Bank reserves are at $3.25 trillion, and should cross $3 trillion within the next few weeks. The Fed has already announced a slowdown in QT to take effect in June because they are aware of this problem.

The Last Yen Intervention vs This One

According to Reuters, the last major intervention in the Yen exchange rate cost the Bank of Japan $50B at a low of ¥151.95. See box below.

This one came at ¥160, so far has cost $70B, and it looks like the BOJ just shot another round of dollars at the Yen just now, so bring that tab closer to $100B now. Though it has been "successful" in the short term, we are still just below the level that triggered the last intervention. They yen is now at ¥152 and it is unclear how long the BOJ can keep this up. The fact that Treasury notes haven't risen suggests that the BOJ had dollar cash on hand and didn't have to sell Treasurys immediately to intervene. How much more cash they have is unknown, but it's about $100B less than April 30.

From a technical perspective, all the BOJ is accomplishing is squeezing out a few yen shorts in the immediate term and scaring others from going in to take their place. But market forces will bring them back in soon. Imagine a wounded animal attracting vultures but it's not quite dead yet, and it thashes at the buzzards attacking it, scaring them away for a while. But the animal still bleeding and dying, and nothing has really changed.

Stagflation Setting In