Coordinated FX market intervention halts yen rise as equities sell off on Japan fears

Tom Tong21/Μαρ/2011Currency Updates

Rising estimates of the economic cost of the Japanese earthquake, together with fears of a nuclear meltdown in the Fukushima reactor pushed risk assets down last week. The flight-to-safety pushed the Japanese yen and the Swiss franc to all-time highs against the greenback on Thursday. On Friday, there was coordinated intervention by the Bank of Japan and other G7 countries and central banks in response to the disorderly price action in the yen, while other asset markets stabilized on Friday in response to the intervention and the absence of catastrophic headlines from Fukushima. Aside from the eye-popping moves and headlines regarding the yen, we continue to be struck by the inability of the US dollar to rally against the euro on flight-to-safety concerns.


Macroeconomic news in the UK maintained their softish tone last week. Unemployment increased slightly to 8%, and a measure of consumer confidence dropped sharply. Sterling traded in a relatively tight band, however, rising 1% against the USD and falling the same amount against the euro to end the week nearly unchanged in trade-weighted terms. All eyes turn now to the critical inflation news to be released next week.


Macroeconomic news was also light and mixed out of the Eurozone last week. Industrial production, construction output and exports to the rest of the world rose 4$, 1% and 15% saar over the average level of the last quarter of 2010, respectively. However, the labour market continues to be soft, with the weakness concentrated in the peripheral countries and particularly Spain, the only large economy where the job market has not reached bottom yet.

The currency, however was buoyed by market perception that the agreement reached the previous week on the bailout facility (increasing its size, and making the rate to be charged conditional on debtor behaviour) was  a step on the right direction, as well as the continued hawkishness of ECB members. It ended the week up nearly 2% against the greenback, and reacted surprisingly well  to the bout of panic that engulfed markets mid-week, showing further signs that it is partly replacing the US dollar as a safe haven in times of stress.


It was a disappointing week for dollar bulls. Neither the Japanese catastrophe, nor the mid-week bouts of panic, nor a slightly more hawkish than expected Fed statement were enough to put a significant bid behind the greenback. Furthermore, the Treasury’s TIC financial flow data showed a surprising drop in foreign appetite for US financial assets, both short and long term. Finally, positioning data showed that speculators’ bets against the dollar are starting to correct themselves without a concomitant rise in its value, which would remove a potential floor on the currency.


The escalating estimates of the cost of the Japanese earthquake, together with the less than reassuring headlines coming out of the Fukushima nuclear plant brought tremendous volatility to the Japanese currency. Late Wednesday, a wave of stop losses lifted JPY by nearly 4% in a matter of minutes, to its all-time high of 76.50 to the US dollar. Then on Thursday, the first coordinated international intervention in currency markets since 2000 brought the yen back below 80 to the US dollar. The yen still rose 1.5% against the greenback for the week, but it seems clear that some sort of a medium term floor has been set and that the Japanese authorities are not likely to let the currency drift above 80 to the dollar for quite some time.


Written by Tom Tong

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