It’s Sunday evening in the U.S., which means that it’s Monday morning in the Far East, with currency traders already hard at work. There has been a good deal of speculation that the Japanese authorities will intervene to drive the Yen lower. A Yen at the current level, around 77 per Dollar, makes Japanese goods very expensive overseas, which in turn reduces exports, hurts the earnings of exporters, and slows the economy.Â Taking a look at a 5-year chart brings home the scope of the problem; in 2007, the USD/JPY rate was close to 125, meaning that the Yen is roughly 38% stronger now. That’s a pretty strong headwind for an export-oriented economy to face, and it becomes stronger with every additional increase in the value of the Yen.
It might be worth taking a minute to discuss the mechanics of central bank intervention. In the case of Japan, the Ministry of Finance, which is roughly analogous to the U.S. Department of the Treasury, instructs the Bank of Japan, which in the U.S context would be the Federal Reserve Bank of New York, to intervene. The BoJ’s traders have several options; they can leave orders to buy Dollars and sell Yen with local banks (many traders believe they were already doing this last week), they can place orders on the electronic dealing machines (Reuters and EBS are the largest), or they can call banks directly, ask for prices, and buy Dollars. They’re capable of dealing in enormous amounts; billions, perhaps tens of billions, of Dollars. They can also ask other central banks, including the New York Fed, to intervene in their own time zones. In general, non-Japanese finance ministries and central banks, not convinced of the utility of intervention, have been reluctant to do so.
The last time I was on a trading desk when the New York Fed came in on behalf of the Bank of Japan, the trader at the Fed made it very clear that this was done to accommodate a central bank peer, and did not represent the policy of the U.S. authorities. In fact, it was so early (6:45 AM or so in New York) that the local market was barely awake. When my trader made an ill-informed priceÂ that would have resulted in a certainÂ loss, the Fed trader, instead of dealing, simply asked him to refresh the quote, and then dealt at a price that was much better for my shop, and by the same token, worse for the Bank of Japan.
A peculiarity of the Ministry of FinanceÂ is that it prefers to intervene when the market is largely complacent and positioned poorly. Because the noise level was so loud over the weekend, it’s hard to believe that any professional trader will be caught by surprise if there is intervention in tonight’s session. This may be enough to convince the Japanese authorities to postpone an assault, in the hope that they can get more bang for their Yen in the future. Their track record has been mixed, and over the long run, as the 5-year chart indicates, they haven’t been successful in doing more than giving traders better opportunities, on occasion, to short USD/JPY.
We did break the 76.25 level on Friday; this was supposedly the “line in the sand” that would provoke an all-out attack by the MOF and the BoJ. Although plenty of stop losses got done on the break – the Dollar got as low as 75.95 – it rebounded pretty quickly, and my sense is that many short term traders are now long Dollars, hoping to take advantage of intervention to sell higher, and then perhaps sell Dollars again from theÂ improved levels. Should the previous low break, I would expect plenty of Dollars to get sold again, but at the moment, we’re almost a Yen higher, at 76.86.
For those involved, or considering getting involved, best of luck, but be careful; when intervention is happening on a large scale, stops can get done some distance from where the orders are left.
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