FX update: pondering the perils of intervention

John J. Hardy, FX Consultant, Saxo Bank

The first coordinated intervention from the G7 in recent memory has the JPY sharply weaker across the board. Does this mean a low for JPY crosses is in place, or will it ultimately fail like all other recent attempts to manipulate a major currency?

It’s one thing when the Bank of Japan makes an effort to intervene against a strong yen, and entirely another when the G7 central banks move to intervene in coordinated fashion as the combined firepower is an order of magnitude larger. For now, the intervention is sticking, and the impressive amounts central banks appear willing to throw at the problem should keep the wolves at bay for some time – not to mention a new round of speculators who are now likely jumping in on the side of the central banks, hoping to take advantage of the tailwind they provide. But how long will this paradigm last? The only thing that is clear at the moment is that intervention can actually increase the two-way risk for the trader – it’s not an “all clear” signal by any stretch of the imagination.

The first key test for where the market stands (tough to determine in the presence of massive intervention almost regardless of the news flow, but more detectable in other markets like equities and bonds) is a firm sign that the Japanese efforts to get ahead of the risks at the Fukushima nuclear plant are going in the right direction. On that note, we should know whether the water-pumping approach or the “Chernobyl solution” (dumping sand and concrete on the reactors to limit radiation release) will win out and whether the crisis is mounting or fading within a week. In the meantime, the market can go anywhere, considering we are dealing with a very different animal when we have coordinated intervention.

Where the tendency when the likes of the SNB was intervening was for brief, spastic moves that were quickly overwhelmed by the market’s “preferred” direction, the larger forces at play with coordinated intervention could introduce larger movements that stick for far longer. Further down the road, the second test for the market is how long the coordinated intervention lasts beyond the far side of the immediate nuclear reactor crisis. One has to imagine that Japan has a few months (3 to 6) of good will. And beyond that time horizon, one wonders if the JPY positive implications of this catastrophe will have faded and whether the focus may have reverted by then to the JPY negative aspects of the fallout – particular the damage this crisis has wrought on the nation’s balance sheet.

Libya
The situation in Libya is fluid at the moment after the UN Security Council gave the go-ahead for a no-fly zone over the country and a carte blanche for military action against Gadhafi “to protect civilians”. This finally happens after it appeared that Gadhafi appeared headed toward an eventual victory in recent days. Just before we are going to press, we get the news that Gadhafi is announcing a halt to military action. This vaporized the rally in crude oil and the Swiss franc today (one can’t help but wonder if some traders are thinking as the intervention unfolded that the CHF is a proxy for where the JPY “ought to be” ex-intervention). What is the wily Libyan dictator’s next move – a stand-off, a continuation of the fight by less over means? This is impossible to discern, but the market has decided to celebrate the risk implications at the moment.

UK and US confidence
With everyone distracted by Japan, JPY intervention and Libya, has anyone noticed that UK Nationwide survey for February showed the lowest confidence level in the 7-year history of the survey? Was this drop simply due to the acceleration of energy prices and the situation in the Middle East or is the bite of bite of fiscal austerity also making its presence felt? Regardless, one wonders how long GBPUSD can passively rally here and it already looks expensive well ahead of 1.6200. The US weekly Bloomberg Comfort index (formerly ABC confidence) out late yesterday wilted to its lowest level since last summer. Let’s see where these surveys go after the immediate emergency at Japan’s nuclear reactors has been resolved. They’re a real worry in the meantime.

Looking ahead
For now, the market is taking the situation as positive for risk – central banks will prevent a meltdown of markets and the Japanese crisis is a “handy” excuse to not move on interest rates. Long live QE to infinity! The S&P 500 is all the way back higher to the lower edge of the range in which it was trading before the disaster in Japan even took place. Can this be? This strikes as extraordinarily complacent. A careful stance is called for now more than ever, as this rush to celebrate risk may not have very sturdy or durable legs. Also, can EURUSD march on its merry way to 1.4300+ ahead of the EU summit next weekend?

Not that they are receiving any focus at the moment, but the last round of lowering of global central bank expectations during this latest crisis has actually favored the USD respectably in the interest rate spreads. Guess we have to park that in the “things that make you go hmmm” department.

Stay careful out there and have a wonderful weekend.

Economic Data Highlights

  • UK Nationwide Confidence fell to 38 vs. 47 expected and 48 in Jan.
  • Germany Feb. Producer Prices rose +0.7% MoM and +6.4% YoY vs. +0.7%/+6.3% expected, respectively and vs. +5.7% YoY in Jan.
  • Switzerland Feb. Producer and Import Prices are out at +0.2% MoM and +0.5% yoY vs. 0.0% yoY in Jan.
  • EuroZone Jan. Current Account out at a seasonally adjusted -0.7B vs. -12.5B in Dec.
  • EuroZone Jan. Trade Balance out at a seasonally adjusted -3.3B vs. -2.5B expected and -1.1B in Dec.
  • Canada Feb. CPI out at +0.3% MoM and +2.2% YoY vs. +0.4%/+2.3% expected, respectively and vs. +2.3% YoY in Jan.
  • Canada Feb. CPI Core out at +0.2% MoM and +0.9% YoY vs. +0.4%/+1.1% expected, respectively and vs. +1.4% YoY in Jan.

Upcoming Economic Data Highlights (all times GMT)

  • UK Mar. Rightmove House Prices (Mon 0001)
  • New Zealand Feb. Credit Card Spending (Mon 0200)
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About abwehra group

The Art&Science of Trading Gold
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