Last week, the Bank of Japan (BOJ) reached their boiling point as the Japanese yen kept staging one strong rally after another. They finally decided that enough is enough, and that it’s time to put their foot down and have an actual intervention.
As soon as USDJPY hit a low of 82.88, the Bank of Japan (BOJ) walked the talk and pushed price back above the 85.00 handle. Of course, that move didn’t come without a cost. Some estimate that the BOJ spent close to a whopping 500 billion JPY to pull this off. Was it worth it? And would it last?
Risk sentiment turned sour
Well, it looks like the effect of this intervention faded just as quickly as it happened. Right now, USDJPY is back under 85.00 as the US dollar suffered a major selloff in the past few days. Blame it on weak economic data from the US and the fact that the Fed is looking to implement more quantitative easing!
Still, it’s pretty clear that investors are hungry for safe-haven currencies such as the Japanese yen and Swiss franc. Major economies like the UK and euro zone have started to churn out worse-than-expected figures lately. And let’s not forget that debt woes and the possibility of a double-dip recession are lurking just around the corner.
Least of all evils?
With the other major economies stuck in deeper ruts than Japan, the investors are finding it easier to put their money on the yen. For one, market geeks think that it will take a long while before the steep budget cuts and tax increases make any difference in the UK economy.
In the US, the Fed is also in on the pity party when it painted a grim picture by hinting at another round of quantitative easing. Lastly, the euro is not out of the boiling water as the region’s debt problem is still very real for the markets. Whew! With bigger problems weighing other economies down, what’s a little deflation in Japan?
Traders have deep pockets
Let’s face it, the market’s pockets are infinitely deeper than any single entity. Historically, currency interventions are short-lived, if not outright failures. Don’t believe me? Let’s take a stroll down the memory lane in June this year when the Swiss National Bank (SNB) allegedly launched a currency intervention to weaken the franc. The traders quickly shaved off the 150-pip gain of EURCHF, and the pair closed 91 pips lower than its open price. And where is EURCHF now? It’s sitting pretty at 1.3200, which is way below the 1.5000 handle where the SNB first threatened intervention! Tsk tsk.
China is heavily buying Japanese assets
Unless you’ve been living under a rock, you have probably heard that China’s purchases of US assets have slowed down this year. While China’s stock of dollar-denominated assets is still admittedly large (somewhere around 65% of their reserves), it has started to diversify in an effort to reduce their risk.
One country that has caught China’s interest is Japan. In order to spread its exposure and pay for Japanese imports, China bought 583 billion JPY (roughly 6.96 billion USD) worth of Japanese financial assets in July, which is a huge leap from the 456.7 billion JPY figure that China had purchased the month in June. As the world’s second largest economy, China’s yen-buying ways could serve as a cue for traders, investors, and hedge funds to grab some yen for themselves!
If not supported by other monetary policies, it looks like the effect of BOJ/MoF recent intervention will be short-lived. While the BOJ may have won the currency battle for now, it looks like traders will eventually win the war. Once traders begin stocking up on yen longs, I’ll make sure that I am there with them!