Is Currency Intervention Possible?
March 10, 2008
The Euro is trading near record highs against the US dollar while the Japanese Yen is closing in on its 8 year high. As the US dollar continues to fall, the burning question on everyone’s mind is, “Will there be Intervention?”
First, don’t expect any action by the US government. Whether they admit it or not, they like the fact the US dollar is falling because it is currently supporting growth by boosting exports.
The focus should be on the European Central Bank and the Bank of Japan
ECB - Slim Chance
This morning, ECB President Jean-Claude Trichet said that he is “concerned about excessive exchange-rate moves.” This is the first time since November 8, 2007 that Trichet has specifically expressed concern about the move in the Euro. Back then, he called the rally above 1.46 “brutal.” That led to a 200 point drop in the EUR/USD that lasted for no longer than 24 hours. This was the same phrase that Trichet used back in November 2004, which eventually led to a top in the EUR/USD, but not until 2 months later.
“Concerned” is definitely a step down from “brutal” but it is important to understand what Trichet is trying to tell us - which is that he cares about what is going in the currency. However for the time being his concern is still limited. The last time the ECB intervened was in 2000 and that was strengthen the Euro shortly after its launch. If the 13 percent rally in 2004 triggered nothing but verbal intervention, don’t expect the 6 percent rally year to stress Trichet out.
BoJ - Watch 100
As USD/JPY nears 100, intervention risk grows but will the Bank of Japan really take action after sitting on their hands for the past 4 years? Probably not. This is not the first time that USD/JPY has traded on the 101 handle without BoJ intervention. Back in late 2004, early 2005, USD/JPY hit a low of 101.70 and the BoJ did nothing, The main reason why the BoJ has not intervened over the past few years is because they want to lead by example and encourage China to make their exchange rate more flexible. If they intervene, it would set back all of their efforts.
However intervention from Japan is still more likely than intervention from the Eurozone because Japanese corporations are beginning to suffer. The most recent Tankan survey showed that most Japanese corporations forecast the value of USDJPY in 2008 to be around 113.00. With the pair now rapidly approaching the 100 level, those hedges are deep in the red.
If they were to intervene, now would be a good time however because positioning in the Japanese Yen is at an extreme. The Japanese Government loves to intervene when long yen, short dollar positions are at extreme levels because they get the most bang for their buck by stopping those traders out and excarbating the rally in USD/JPY in the process. Yen long positions are at the highest levels since Feb 2004, right before the last BoJ intervention. Therefore I would be particularly careful about with USD/JPY shorts at the moment.
Is Intervention Worth the Effort?
No. Intervention has rarely resulted in a medium term top or bottom in a currency pair. We last saw that with the the Reserve Bank of New Zealand intervention in June 2007. The NZD/USD sold off for 200 pips, but it then quickly recovered those losses and went on to hit a 25 year high 2 months later. The only way for intervention to work would be if it was coordinated between the US, Japan and the Eurozone. Unfortunately the US is not going to agree to this anytime soon.
Posted in Bank of Japan, Currency Intervention, ECB, Euro Intervention, Intervention, Japanese Yen, Yen Intervention
content rss
March 11th, 2008 at 3:50 am
Your insight is well appreciated. I like your gut feelings. Don’t trade currencies, just the u.s. equity markets but nevertheless your views edify my own and have important relevance as the fed continues its kamakaze course of monatary policy.
I really wonder if the fed will go through with a .75 basis point cut this time around. I understand its what they “need” to do, but alot of commodity trades are crowding up on this anticipation. You can see oil prices revving up on this anicipation testing 107 and 108. It makes you wonder if sovreign wealth fund money is waiting in the wings not to enter the equities markets long but to blast oil and oil shorts into the stratosphere on that announcement. I’m wondering if the fed might throw a curve ball and cut just a half to send those trades in dissarray, but it would just be delaying the inevitable. I suppose.
In any case, i’m glad i discovered your site! Perhaps one day i will subscribe to your service if currency trading becomes more of a possibility for me.
March 11th, 2008 at 8:56 am
[...] I consider this another form of coordinated intervention. [...]
April 16th, 2008 at 3:51 pm
[...] have previously mentioned that the European Central Bank’s pain threshold for the Euro could be as high as 1.62. In 2004, the last time the central bank become extremely worried about the movements in the Euro, [...]