October 6, 2010

A Losing Battle For The Bank Of Japan

Filed under: Uncategorized — bigcapital @ 6:44 pm
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LONDON — This is one battle the Bank of Japan will still lose.

The central bank’s attempt to weaken the yen against the dollar this week with more monetary easing may be more politically palatable than direct market intervention and even more cleverly designed to undermine the Japanese currency more over time.

But, its success is likely to be limited.

The dollar’s weakness is still driven largely by U.S. policy expectations rather than anything else.

The yen will also still find support from continued strong safe haven flows in its direction as well as from Japan’s continued current account surplus.

Sure, the Bank of Japan’s decision to cut its target interest rate to zero and to introduce a Y5 trillion package of temporary asset purchases Tuesday shows its determination to prevent the yen from rising any more, despite the essential failure of last month’s massive market intervention on September 15.

The further monetary easing also suggests that the central bank is now working more in harmony with the Ministry of Finance in the hope that together they can overcome Japan’s persistent deflationary pressures.

A fall in the country’s two-year government bond yields to a 5-year low and a decline in 10-year yields to a 7-year low certainly suggested that the central bank’s move should help to reduce support for the yen.

Also, if the central bank decides to intervene against the dollar again, the looser monetary policy should help to increase the chances of at least some success.

There was talk late Tuesday in New York of Japanese players close to the government, in the market buying dollars but nothing concrete was confirmed.

However, the Bank of Japan’s move has come only weeks before the U.S. Federal Reserve is expected to pursue its own increase in monetary easing.

Over the last few weeks, as the U.S. recovery has faltered badly, the Fed has made it plain that it is on standby to increase quantitative easing if needed. Fed Chairman Ben Bernanke upped the ante even more with a speech late Monday pointing to the success of the central bank’s initial QE exercise and suggesting that more easing could help the economy avoid a double dip recession.

Of course, the size and extent of the Fed move will have some bearing on just how much the dollar is depressed.

However, the chance of the yen making a sustained decline against the dollar, and bringing some relief for Japanese exporters, will also depend on safe haven flows.

In recent months, the yen has remained very much in favor, as concerns over the global economic recovery has encouraged investment flows out of riskier asset markets, including the dollar, and into safe havens, such as the yen.

See how the dollar has continued decline against the yen since the Sept. 15 intervention:

The yen will also continue to find support from Japan’s continued strong current account surplus, which ensures underlying support for the Japanese currency regardless of what the Bank of Japan and the Ministry of Finance are cooking up on policy.

Early Wednesday, the yen was holding very steady against the dollar–with the U.S. currency trading at Y83.15 at 0645 GMT compared with Y83.18 late Tuesday in New York.

The dollar was still under pressure elsewhere from expectations of further quantitative easing by the Fed next month.

The euro rose to $1.3853 from $1.3835 and to Y115.23 from Y115.11.


September 15, 2010

M-Talk: BOJ intervention, Washington May Be Supportive of JPY Move

M-Talk: BOJ intervention, Washington May Be Supportive of JPY Move

U.S. is likely to provide implicit support for Japan’s intervention to weaken JPY, by withholding criticism, unless Japanese government attempts to weaken JPY over sustained period, says Peter Kenen, professor of economics at Princeton University and former Treasury consultant under several U.S. administrations. “This is aimed at warning people off and breaking the one-way bet that Japan has been experiencing,” he adds, noting move, which he calls “both feasible and sensible,” will likely be effective to counter upward drift in JPY. USD/JPY last at 84.85, well above intraday low at 82.85

Something similar has happened before. Eight years ago, panic in the global financial markets sent the yen surging 20% in less than two months and other markets collapsed, particularly emerging markets, as investors rushed to repay their yen. Then, as Japan’s economy worsened, the trade became popular once again.

The Japanese Yen could feel pressure from a renewal of the carry trade

But what is the yen carry trade? Put simply, it is borrowing at low interest rates in yen and using the loan to buy higher yielding assets elsewhere. During the past decade, the trade has become a “staple” for many investors, says William Pesek Jr on Bloomberg. Perhaps the most popular form of the strategy exploits the gap between US and Japanese yields. Anyone borrowing for next to nothing in yen and putting the money into “US Treasuries” (US government bonds) has received a double pay-off: from an interest rate difference of more than three percentage points and from the dollar’s rise against the yen. Investors make their profit when they reverse the trade and pay back the yen loan.

A carry trade strategy seeks to profit from the interest rate differential between two currencies. The approach is to select a currency pair where you sell (go short) a currency with a low interest rate, while simultaneously buying (going long) a currency with a higher interest rate. When you hold this currency pair open in your trading account, you must pay interest on the short position, while you receive interest on the long position. If you receive more in interest than you pay, this difference – known as interest rate carry or simply carry – is retained in your account as profit.

Does that mean the yen carry trade is back today? – Market Talk

Wednesday. September 15, 2010

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