BIGCAPITAL's Blog

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

Japan Intervenes To Weaken Yen And Warns Of More

JPY yen

Japan intervenes to weaken yen and warns of more

Japan sold yen in the market on Wednesday for the first time in six years and promised more to come in a bid to stop the currency’s relentless rise from hurting exporters and threatening a fragile economic recovery.

Fresh after victory in a party leadership contest, Japan’s Prime Minister Naoto Kan appeared to be stepping up efforts to wrench the country out of deflation by targeting yen strength, which has weighed on stock prices and corporate profits.

Estimates varied on how much Japan has spent in its first intervention in the foreign exchange market since 2003-2004, when its forked out 35 trillion yen ($409 billion).

Dealers suggested Wednesday’s intervention amounted to about 300-500 billion yen ($3.6-$6 billion), though some reports put it closer to 100 billion yen.

The U.S. dollar was boosted further after an official at Japan’s Ministry of Finance said intervention was not finished. It climbed about 3 percent on the day to more than 85.50 yen, having dropped to a 15-year low of 82.87 yen earlier.

Unlike in previous intervention, the Bank of Japan will not drain the money flowing into the economy as a result of the yen selling, sources familiar with the matter said.

That indicated the central bank plans to use the sold yen as a monetary tool to boost liquidity and support the economy.

Authorities that sell their own currencies to weaken them often issue bills to “sterilize” the funds and keep the excess money from becoming inflationary. In Japan’s case, it wants to promote inflation since the economy has been dogged with deflation for much of the past decade

The central bank may follow up with additional steps, such as buying more government debt, economists said.

“SYMPATHY”

Finance Minister Yoshihiko Noda, who will reportedly keep his post after a cabinet reshuffle, indicated Tokyo acted alone on the yen. He said he was in contact with authorities overseas and analysts expected Japan to be spared international criticism.

“Japan will be seen as a special case,” said Simon Flint, global head of foreign exchange research with Nomura in Singapore. “Obviously, its economy has been in significant trouble for a while, stocks have been depressed for some time, export performance relative to the Asian peer group has been very weak,” he said.

“To some degree there will be some sympathy in the rest of the world for Japan’s predicament.”

U.S. officials at the Federal Reserve and the Treasury declined immediate comment.

Analysts doubted whether Kan’s government was ready for a protracted battle with markets similar to the 15-month yen selling spree earlier this decade since that campaign prove ineffective at halting the yen’s strength for long.

WILL THE YEN STOP RISING?

Kan’s government has been trying to talk down the yen as it strengthened beyond 90 per dollar

“The government probably wanted to stamp out those views. But the question is: Will the yen stop rising from here? It’s not clear.”

USD/JPY’s recovery from around the session lows of 85.00 comes as a Japanese government official confirms the MOF/BOJ has intervened in European markets Wednesday

* Japan PM Kan: Intervened in fx because yen reached level where action was needed.

Japan’s Ministry of Finance said intervention was not finished. Japanese news agency Kyodo cited a ministry official saying Japan had intervened in European markets and will intervene in New York trading hours if need be.

www.Intermoney.org – Market Talk

Wednesday. September 15, 2010

UPDATE: 07:25 ET (11:25 GMT)

USD/JPY Rally May Be Attacked Next Week

Filed under: Uncategorized — bigcapital @ 5:25 pm
Tags: , , , ,

USD/JPY Rally May Be Attacked Next Week

The BOJ’s first intervention for the time since 2004 leads to a 200 sen rise in USD/JPY.

Mizuho Corporate Bank’s Nicole Elliott says the talk that is Y100B was spent, much of it around 83.30 with the rate topping out so far just above the pivotal 85.00 level. Elliott says looking at the charts, the move started at the bottom of a wedge formation that has dominated trade since late 2008 and there is now a potential ‘bullish engulfing candle’ which suggests the rate will hold above its 82.87 low for the rest of the week at least.

source: Citigroup

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?

http://www.Intermoney.org – Market Talk

Wednesday. September 15, 2010

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