FOREX: Dollar, Franc May Rise as Markets Digest G7 Action, Look to Libya

Overnight Headlines

• Japanese Yen Drops Nearly 4 Percent as G7 Steps In to Boost Exchange Rate
• Australian, NZ Dollars Outperform as Intervention Bolsters Risk Appetite

Critical Levels

The Euro and the British Pound advanced, adding as much as 0.5 and 0.4 percent respectively against the US Dollar as a coordinated intervention into the Yen exchange rate boosted risky assets (see below), weighing on the safety-linked benchmark currency along with the Swiss Franc. We remain short EURUSD and NZDUSD.

Asia Session: What Happened

The Japanese Yen slumped dramatically in overnight trade, down as much as 3.9 percent on average against its major counterparts, as the G7 began a coordinated intervention to drive down the currency after it spiked to a record high yesterday. According to Japanese Finance Minister Yoshihiko Noda, authorities in the UK, US, Canada and the Euro Zone participated in the intervention, the first such move in over a decade.

The speedy response from global policymakers underpinned sentiment in overnight trade, boosting Asian stock exchanges and driving risk-correlated currencies higher. The Australian Dollar outperformed, adding as much as 2.6 percent, while the New Zealand Dollar peaked with a gain of 1.8 percent against the majors. The MSCI Asia Pacific regional equity benchmark index rose 0.3 percent.

Euro Session: What to Expect

With little of note on the economic calendar, the fallout from the G7 intervention into foreign exchange markets is likely to remain as the central theme guiding currencies through the end of the week. While stock index futures tracking major US and European exchanges are pointing aggressively higher, this appears to be reflecting a catching-up to price in the events in Asia. With that in mind, the impact of continued equity gains on risk FX ought to prove limited, perhaps opening the door for a bit of retracement in overnight price action.

As the dust settles, the spotlight may shift back to the crisis in Libya after the UN Security Council authorized the establishment of a no-fly zone as well as possible military actions “to protect citizens”. From here, the decision to intervene with force falls on each UN country individually, and the uncertainty about how events in the embattled North African country will unfold over the days ahead ought to renew upward pressure crude oil prices. In turn, this may prove to weigh on sentiment as initial optimism following the G7 action overnight is digested. As we have noted previously, markets see the situation in Libya as a test-case for what the worst case scenario in the aftermath of a protest flare-up could look like, so any action on the part of foreign powers from here (whether that is to intervene or not) will be weighed up as if it were happening to a far more significant crude supplier than Libya itself (i.e. Saudi Arabia).

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