On Wednesday of last week the Bank of Japan intervened in the currency markets, selling Japanese yen and presumably buying US dollars, in an effort to stop the strengthening of the yen. Intervention came just below the breach of the 83.0 level against the US dollar – this helped lift the USD/JPY pair to trading beyond the 85.0 price within the day, and has up till early this week managed to hold the USD/JPY price around 85.0.
The yen had reached 15-year highs in recent weeks against the US dollar. The last Japanese intervention dates back to 2004. The yen’s strength is threatening Japan’s recovery, because it might weigh negatively on the competitiveness of its exports – which are a significant contributor to Japan’s economic growth.
Some analysts have their doubts on how much this unilateral intervention will be leaving a long term effect on the price of the pair. The increase in the global volume of foreign exchange trading will somehow hamper single governments from countering the bigger market trends. The SNB decided to drop their pledge on currency market intervention, earlier on this year, after it proved to be too costly.
Analysts report that the value of the SNB’s foreign exchange reserves lost more than 14 billion Swiss francs, losses which may be attributed to the euro’s fall in value – and support for the CHF still persists today. This is an example of the weak long term efficacy of these kinds of intervention.
The yen was gaining support on safe haven inflows given the prevailing longer term concerns for global growth. The low US government bond yields were also helping to make the yen more attractive as well, and speculation that that the United States might engage in quantitative easing (QE) could further narrow the gap between US and Japanese yields in the near future and continue to favour the yen.
If Japan decides to channel these US dollars in US treasuries it may be reducing some of the Fed’s pressure to embark on QE. However this remains to be seen.
The prospects of the United States embarking on QE saw the US dollar lose support Monday morning ahead of the FOMC meeting that was due late Tuesday evening this week. The AUD on the other hand was enjoying renewed support on the back of hawkish comments from the RBA. The shifts in the currency markets highlighted the divergence in policy outlook both central banks hold.
Prior to the FOMC meeting the Fed was not expected to make any changes to its policy rates; there was however increased expectation that QE could start featuring in the Fed’s comments, to prepare the markets for future QE intervention.
If the Fed failed to embark on further QE this meeting, it might be taken to imply that the probabilities of a double dip are easing and a rally could benefit riskier assets. On the other hand a move towards QE could signal concerns over future economic growth and thus risk aversion might take the lead and favour the “safe haven” currencies.
AUD was the biggest gainer, early Monday morning, after hawkish comments from the Reserve Bank of Australia’s Glenn Stevens. While acknowledging that a US recession, a Chinese slowdown and more market turmoil remain potential risk scenarios Mr Stevens said that if these risks do not materialise a fairly robust upbeat lies ahead. Mr Stevens also noted that a “fall in inflation over the past two years won’t go much further.” Consequently traders are seeing an increasing chance of a rate increase in the next RBA meeting.
In the meantime, gold continued reaching new daily highs on the back of the global economic concerns, reaching beyond $1,280 per ounce at the time of writing. Even silver enjoyed some safe haven flows as investors were seeking cheap safe havens. At the time of writing silver was trading beyond $20.80 per ounce, a level which it had last seen back in March 2008.
Upcoming FX Key events:
Today: German PMI, Eurozone PMI & US Existing Home Sales.
Tomorrow: German IFO Expectations & US Durable Goods Orders
FX Technical Key points:
EUR/USD is bearish, target 1.1800, key reversal point 1.3400.
USD/JPY is bearish, target 80.00, key reversal point 90.00.
GBP/USD is bearish, target 1.4000, key reversal point 1.6500.
USD/CHF is neutral.
AUD/USD is bullish, target 98.00, key reversal point 84.00.
NZD/USD is bullish, target 0.78, key reversal point 0.6800.
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Mr Muscat is senior trader at RTFX Ltd.