Yen sales feel flesh wound from Bank of Japan

The battle lines dividing the Bank of Japan from speculators driving the yen skywards have been drawn. For the first time in 15 years, the yen yesterday dipped beneath ¥83.00 against the dollar serving to prod the authorities into action. The yen slumped to ¥85.52 as the central bank caused a painful resolve to those hell bent on pushing the yen higher. The Nikkei newspaper suggests the Bank sold ¥100 billion while the Wall Street Journal says it hears the amount was three times that amount. Regardless of which is right at this point, bullish yen positions have suffered a mere flesh wound in this first test as the volume of intervention proves to be a mere drop in the bucket.

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Japanese yen – The yen recoiled from a 15-year high per dollar after Japanese Finance Minister Noda told reporters that Japan had acted alone in selling its currency following its recent surge and warned that there would be more to come if the export-led recovery remains hostage to the unwarranted strength of the yen. Bank of Japan Governor Shirakawa also issued a press statement to avoid any confusion. The bout of intervention by the Japanese was taken in isolation although it was indicated that affected authorities were informed ahead of time. Mr. Noda said to the press that he hoped the yen sale would help stabilize the forex market as he explained that the already well-documented escalation of downside risks to the economy must be met with decisive action.

If reports of today’s yen sales are accurate, they pale into insignificance compared to previous rounds of concerted intervention. The last time the Bank of Japan intervened was six years ago in 2004 when it sold ¥14.8 trillion while record sales in the previous year totaled ¥20.4 trillion. The impact of today’s action is impressive and appears to have been extremely well-timed. Yet time will tell whether the message has been well enough received and we must now wait and see the actions of those stunned into turning tail today when the dust has settled.

U.S. Dollar – The catalyst for the urgency of Japanese intervention came in Tuesday’s trading when the dollar slumped unilaterally and seemingly without cause. The mid-morning slide in the dollar came well beyond the retail sales data, which in the event was actually a dollar positive. But it appears that some large orders must have sparked dealers’ attention causing dollar sales across every other pair. Little did the market realize at the time what the overnight response might be in Tokyo. This morning the dollar index has risen by 0.5% to stand at 81.54.

Aussie dollar – The Aussie took advantage of the round of intervention by rallying hard against the yen from ¥78.00 to ¥80.25. But it lost ground to the dollar, although remains near a two-year high at 93.75 U.S. cents. Data released overnight was mixed. Most notable was a 5% slide in the Westpac reading of consumer confidence, which slid from 119.2 to 113.2 and doesn’t fit the mold of a robust economy where retail sales have held up well in the face of monetary tightening. Meanwhile, second quarter building starts rose far less than expected with a rise of just 0.8% compared to a forecast of 4.5%. First quarter series data was revised sharply higher with starts surging by 9.1% in fresh data. The original rise was 4.3%.

British pound – Sentiment towards the pound continues to display erratic behavior. The pound fell from yesterday’s peak at $1.5587 after the first rise in claims for unemployment in seven months. Forecasters predicted that employers would add 2,300 positions during August but jobless claims rose by 3,000. Meanwhile data for July also suffered a negative revision. The pound yielded 140 pips to an intraday low at $1.5449 before heading back towards $1.5570. The pound’s performance has been hampered by expectations that the economy may slow in the face of spending cuts enacted to keep the budget deficit on track.

Euro – The euro reached $1.3033 on Tuesday and has been on a downwards trajectory ever since. Attempts to rally appear capped at lower levels on each push forward. Currently the euro has rebounded from its worst point of the day at $1.2959 to stand at $1.2995 meaning that the battle once again seems to pivot on a central point of $1.3000. Consumer price data was also released for the Eurozone earlier and showed a 0.2% monthly increase to leave prices higher by 1.6% year-over-year.

Canadian dollar – The Canadian dollar suffered a more gradual pace of gain against the dollar on Tuesday but appears to have given all of that ground back in today’s action where the unit buys 97.15 U.S. cents.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.
About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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