The costly episode of knock-and-run initiated by a speculative element within the foreign exchange market after disaster struck Japan came to a crushing end on Friday. Dealers had been dashing up the driveway, ditching dollars, stealing yen and dinging on the doorbell in a quest to see whether anyone would ever open up. Today they got a rather loud answer as the door slammed open and a torrent of official intervention was unleashed not just by Japan, but also from the global alliance of G7 nations.
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Japanese yen – Vice Finance Minister Igarashi expressed hopes that today’s currency intervention would put a floor beneath the dollar’s value against the yen following a surge to a post WWII peak when dawn was breaking in Japan on Thursday. He also noted that it would be logical for the yen to fall and for yields to rise following the disaster as the nation issues bonds to fund a disaster response. Mr. Igarashi said that this was also the authorities’ worst fear. The Bank of Japan has subsequently confirmed that it sold less than ¥2 trillion against the dollar while statements from the Bank of England, the German Bundesbank and the Banque de France confirmed that they would also intervene. The yen fell the most since 2008 and currently trades at ¥81.49 having earlier reached ¥82.00. The G7 also said they may intervene to suppress the value of the yen against the euro, causing the euro to rise by 4.1% to buy ¥115.25. The coordinated nature of intervention is the first since central bankers bought the ailing euro in 2000 shortly after its birth.
Aussie dollar – The Aussie also surged by around 4.6% versus the yen to purchase ¥80.85 on Friday. Stocks in Japan recovered with a 3.5% gain as dealing with the rising yen helped provide some respite to exporters. The Nikkei 225 index nevertheless closed the week with a 10% loss. Intervention efforts and recovering equity markets provided a weekend tonic for the Aussie as it rose to 99.48 U.S. cents during the European session before paring gains in response to an after-hours increase of 50 basis points in the reserve ration requirement by the PBOC. The timing of that move seems at odds with the coordinated attempts to weaken the yen, but don’t forget that the Chinese yuan is not sufficiently traded to qualify it as a reserve currency.
U.S. Dollar – The dollar’s use as a store of value lately has been questionable to say the least. The dollar index remains at its lowest since November and is heading to a lousy end to the week at 75.88. Despite its jump against the yen today it is being outflanked across all fronts elsewhere possibly because the natural disaster in Japan is likely to clip the wings of global growth leaving U.S. monetary policy on hold for longer than was thought just one week ago.
Euro – The euro continues its advance against the dollar following G7 intervention to weaken the yen and at $1.4126 has just made a fresh high for the week and appears on course to challenge its November peak at $1.4249. During the week an ECB policy-maker promised to consider Japan at the forthcoming meeting of its members. The slide in global yields as fears rose caught the bears napping. A February producer price report from German released this morning has reminded investors that although the monthly pace eased back somewhat, prices are now running ahead by 6.4% annually and that won’t bring any smiles when the ECB convenes. The agreement to joint intervention is also a consideration to Japan that might be a convenient cost for moving ahead with its plan to fight rising prices with higher interest rates.
British pound – The pound sank for a fourth week against the euro to trade at 87.58 pence as further evidence emerged that monetary policy divergence will favor the single currency in the spring months at least. A Nationwide building society survey of consumer confidence sank to the lowest since records began in 2004. And just to show how out of tune analysts have become with economic realities, the index fell 10 points to a reading of 38 while the expectation was for an unchanged reading of 48. The fewest survey respondents on record felt that now was a good time to buy while consumers pointed to a lack of confidence in the sustainability for the recovery and warned over job prospects. None of this is hardly surprising given the height from which the public spending axe fell at the start of the year. Embedded within market sentiment is a sensation that inflation will win over policymakers who have voiced similar fears that growth is likely to suffer in the quarters ahead. The pound breached support against the euro earlier in the week and declines have subsequently accelerated. The pound did rise against the dollar but by barely a jot to $1.1651 given the all-round weakness of the dollar today.
Canadian dollar – Tame inflation data has the potential to further undermine the Canadian dollar on Friday, while a rebound in risk appetite and further gains for crude oil prices is currently helping to maintain its buoyancy. The unit dipped earlier following a better than expected reading for consumer price inflation, where prices rose by 0.3% during February to leave them 2.2% ahead of a year ago. On the Bank of Canada’s preferred core index, the 0.2% monthly gain left the annual change at 0.9%. What’s likely going on is that currency strength is shielding the economy from imported inflationary pressures, which further argues against monetary tightening and perversely could weaken the unit ahead. For now, however, the unit is likely to remain a market darling and after the report buys US$1.0187.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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