I dunno about you, but I was pretty stunned when I woke up this morning and saw the HUGE move among yen pairs. We saw USD/JPY drop almost 500 pips to hit a new all-time low, while EUR/JPY and GBP/JPY also dropped more than 500 pips before recovering earlier today.
To put this into perspective, this equated to about a 5% gain in the yen and is one of the five largest moves EVER. Heck, we haven’t seen anything like this since the fat-fingers episode last May! But this time around, we can’t put the blame on a slip of the finger and an order error.
Lately, the yen has been on a roll, thanks to repatriation moves by Japanese companies and the unwinding of carry trades in the market. With Japanese companies in dire need of cash, they’ve begun to pull out of their foreign investments in order to bring back some money to the motherland to help recovery efforts.
As for the ridonculous spike we saw on the charts, we gotta take into consideration the timing of the move. The massive move took place at the end of the New York session and just before Tokyo woke up. With the lack of liquidity in the markets, any sharp move can become exaggerated, which is exactly what happened in yen crosses.
With the yen now at an all-time high, it has led to speculations that the Bank of Japan now has no choice but to intervene in the markets.
Holy smokes, did I just say currency intervention?! Surely the markets don’t really expect the BOJ to try again another one after their last attempt at controlling price action flopped like Disney’s Mars Needs Moms in the weekend box office.
Recall that in September 2010, the BOJ injected close to a staggering 500 billion JPY when USD/JPY reached a low of 82.88. The intervention worked, too – for three trading weeks, that is. After closing at 85.61 on the day of the intervention, price went back down to trading below 83.00 and is now hovering below 80.00.
Historically, currency interventions have been largely unsuccessful. You see, with trading volume in the forex market reaching as much as $4 TRILLION a day, it is difficult for any central bank to control price action for long, at least without a coordinated effort with other major central banks… or help from Chuck Norris.
I know your bright minds are full of questions right now. If interventions have flopped in the past, why even bother trying again? Isn’t the BOJ basically just throwing away money with its futile attempts? How many licks does it take to get to the center of a Tootsie Pop?
Okay, that last question might be a little bit off. But maybe what we should be asking is, “What other choices does the central bank have to stop the yen’s onslaught?” Injecting the markets with trillions of yen, as the BOJ has done over the past few days, clearly hasn’t helped much. It resulted in nothing but insignificant hiccups on the charts.
A direct market intervention may be its only hope to stop the yen from rising. Remember, the BOJ is facing an uphill battle here. We have turmoil in the Middle East, sovereign debt issues in Europe, and nuclear meltdown threats in Japan–three very good reasons for investors to stay away from risky assets, deleverage carry trades, and buy back the yen.
Another reason why they should keep trying to intervene? Exports! I’ve already explained a GAZILLION times how the yen’s appreciation can hurt Japan’s exports! With Japan’s economic future in question, now is as critical a time as any for the BOJ to protect its export industry.
The good news is that if the BOJ does decide to step in this time around, it may get a helping hand from a few friends. For the sake of market stability, it’s possible that the Fed and the ECB will support Japan and its intervention efforts.
Yes, it’s true that no single central bank can conquer the market. In fact, there’s a chance that two or three central banks working together won’t even get the job done! But as this point, the goal doesn’t have to be to weaken the yen completely. It might be good enough to slow the yen’s rise, at least until Japan can adjust and recover.