These Banks are no strangers to intervening in the currency markets. The last time a major coordinated effort was made to intervene was in September 2000, when the Fed, BOE, BoJ, and BoC joined forces with the ECB to support a beleaguered euro. Meanwhile, the RBNZ intervened just last year to cap gains in the
Of the G-10 countries, Japanese policymakers are the most likely to get their hands dirty and intervene in the currency markets when the Japanese yen’s price movements are too volatile and extreme for their liking. However, the Bank of Japan and Ministry of Finance have been a bit more lenient in recent years, as the last official intervention was conducted in March 2004. Nevertheless, policymakers have plenty of reason to be concerned about the Japanese yen’s most recent surge, as the USDJPY pair has recently tumbled to am 8-year low of 101.40. The strength of the currency is hurting the profit margins of major Japanese corporations, as the most recent Tankan survey showed that most Japanese corporations forecast the value of USDJPY in 2008 to be around 113.00. With the pair now rapidly approaching the 100 level, those hedges are deep in the red. Furthermore, Japanese Economy Minister Hiroko Ota noted that the approximate break-even point for companies is at the 106.60 level, and firms like Toyota, Yamaha Motor Co., and Nippon Steel have all reported disappointing earnings as a result. Unsurprisingly, the shares of exporters have taken a hit and are a major reason why the Nikkei Stock Average has plummeted declined 6 percent over the past five days, the biggest loss since the week ended August 17.
Given the virtual standstill in economic activity, the growing squeeze on Japan’s export sector, and the sharp drop in the Nikkei, it is not unreasonable to wonder if the Bank of Japan may consider intervening in the currency market to help prop up USD/JPY above the 100 level – a point not seen since December 1995 – in order to assure that the country’s exporters are not crippled by uncompetitive exchange rates.
While the effectiveness of currency intervention as a policy tool has been an ongoing debate within the financial markets and academia for years, there is little argument that at least in the short term, it can be brutally effective. Amongst the G-3 central banks, the Bank of Japan is by far the most active practitioner of this policy. Furthermore, the Bank of Japan prefers to optimize the effectiveness of its intervention by fading speculative extremes, meaning that the currency pair can rise by hundreds of points within minutes. However, the most recent COT data shows that yen positioning is not extreme quite yet, suggesting the currency may have more room to gain. Either way, FX traders who are short USD/JPY need to be increasingly careful and stringent with their stops as the currency approaches 100.
European Central Bank – With Inflation Running Rampant, Intervention May Do More Harm Than Good
Although selling euros in the cash market would certainly create a near term correction in the EURUSD, it is unlikely to be a viable medium term solution. When the ECB intervened back in 2000, fundamentals supported a stronger EURUSD, as the pair traded near 0.86. While the intervention was initially a losing proposition (the pair fell to 0.8225 within a month), the move was eventually effective in creating a bottom in the currency pair. This time around, the
The comments were followed up by a dour outlook by Martin Winterkorn, the chief executive of Volkswagen, who said that the company will likely continue to lose money in the
Indeed, inflation in the Euro-zone is accelerating at a rapid 3.2 percent annualized pace, the fastest rate of growth since the euro was introduced in 1999. The combination of record energy and food prices has led broad consumer costs to rocket, but consider this: if the euro were to weaken, the cost of imported goods like oil would rise even faster. As a result, the Euro-zone is actually benefiting from the currency’s appreciation given the current inflationary environment. These circumstances underpin the ECB’s focus on price stability, as the Bank left rates steady at 4.00 percent in March and followed the decision up with hawkish commentary from ECB President Trichet.
Reserve Bank of
During June 2007, just a week after raising interest rates to 8 percent, the Reserve Bank of
As an export dependent country, the general fear is that the strength of the kiwi would take a big bite out of exports. Both RBNZ Governor Bollard and Finance Minister Cullen had repeatedly warned that the currency is extremely overvalued. Yet despite this strength, the RBNZ had no choice but to raise interest rates four times over the course of 2007 to a current record high of 8.25 percent as inflation growth spiraled out of control. The unprecedented move indicates that this was a very serious step for the central bank and not one that to been taken lightly. However, the RBNZ has not intervened since mid-2007, despite the
Is Intervention Worth the Effort?
As we noted above, the Bank of Japan, European Central Bank, and the Reserve Bank of