.
BY SHAVASB BOHDJALIAN
The Bank of Japan (BOJ) acting on orders of the Japanese Ministry of Finance surprised markets on Monday by intervening massively in the forex markets, selling the yen to the equivalent of $30-40 bln. The price action saw the yen weakening from a record high of 75.50 to 79.50 against the dollar.
The MOF cited the recent yen strength as the reason why it decided to intervene, blaming it on the speculators, but this does not appear to be the case, at least based on IMM positioning data, which does not show a massive yen short positioning. The explanation as to why the yen has been gaining ground in recent months is probably because local Japanese investors have stopped investing abroad and are keeping their money at home since overseas yields are now significantly less than before.
It remains to be seen if this round of intervention will succeed, or as has been the case in the past, simply slow the pace of yen appreciation.
To succeed, a clear commitment to do whatever it takes such as the stance taken by the Swiss National Bank that it would print and sell unlimited amount of Swiss francs (CHF) and lower the value of the currency would be needed.
While the Swiss may get away with their action because the Swiss economy is small and the currency had really appreciated far too much, such a policy statement from Japan may not be tolerated by the G7 or the G20.
The Japanese may however lessen criticism at the forthcoming G20 Summit against their intervention policy if they promise to sell yen and buy euros to invest in the EFSF. Japanese officials promised Klaus Regling, the head of the EFSF during a visit to Japan last week that they would buy the EFSF bonds.
It would not come as a surprise if the MOF/BOJ keep intervening between 75.00-77.00 against the dollar and 106.50-107.50 against the euro and channel the proceeds into the EFSF bonds with the total amount likely to reach $100 bln to match a report appearing in the FT, which reported that China could contribute between $ 50 to 100 bln into the EFSF or a proposed SPIV in conjunction with the IMF, if there was participation from other nations.
With Japan now joining the Swiss in wanting to aggressively weaken their currency, market participants are now waiting to see what the Swiss National Bank (SNB) will do and more importantly how the SNB will react to last week’s surprise strengthening of the CHF against the EUR.
After the EU Summit reached a broad based agreement on saving Greece and extending the leverage of the EFSF, though as usual, it was short on detail, one would expect that a rallying euro against the dollar would also outperform against the CHF. The contrary happened as the EURCHF cross weakened to 1.2165 area from levels of 1.2475 seen earlier last week.
Considering that the market was awash with rumours that the SNB was considering moving the EURCHF floor to 1.25 from 1.20, last week’s move may best be explained as an attempt to flush out the late longs.
Perhaps more light on future Central Bank action will emerge during the week after the Fed concludes its FOMC meeting on Wednesday and the ECB on Thursday. With the Euro area flash CPI data coming at 3%, market participants do not expect an ECB rate cut as early as this week, but central banks are known for wishing to act when the market least expects them, so now may be a good time to act.
Money markets ended Friday ascribing only about a 20% chance to a 25-point cut, so a move would be a surprise and would therefore be expected to have at least temporary effect in softening the euro. This may also be considered as a good opportunity for major institutional investors with a long term horizon to snap the EURCHF at the lows and close to the 1.20 floor ahead of more action by the SNB to weaken the CHF.
www.eurivex.com
[email protected]
(Shavasb Bohdjalian is an approved Investment Advisor and CEO of Eurivex Ltd., a Cyprus Investment Firm, authorized and regulated by CySEC, license #114/10. Eurivex is active in the management of ICIS and acts as Nominated Advisor for listings on the Emerging Companies Market of the Cyprus Stock Exchange. The views expressed above are personal and do not bind the company and are subject to change without notice. Investing in markets and trading on leverage is highly risky and it may not be suitable to all investors since it carries a high degree of risk and you can lose more than your initial investment)
