Sunday, March 20, 2011

G-7 Intervention, The Week in Review

The Group of Seven may have launched their first concerted currency
intervention in over ten years, but its chance of success, while
perhaps better than even, is by no means assured. Dollar purchases by
the central banks, in the Tokyo, European and American markets on
Friday lifted the currency by more than three figures against the yen,
from 78.82 as high as 82.00, a third of which had been lost by the

The timing chosen by the central banks, almost immediately after a
punishing stop loss run from 79.80 to 76.25 the day before, had good
market rationale. Sell stops tend to act like quicksand on a market,
drawing traders and the market to their execution.

If the banks had intervened before the stops were executed and then
over time the levels drifted lower toward the area below 80.00, the
orders would have been executed despite the bank's prior intervention.
Then intervention, always risky, would then have looked like a
failure. It is as certain as possible without actually knowing, and
the banks will not inform, that the central bank decision makers and
their execution desks were aware of the stop loss sell orders below
79.80 and that knowledge informed their decision.

Currency markets will have a hard time returning to comparative
economic logic until central banks resume normal interest rate
policies. As long as the Federal Reserve has a zero rate, and that is
an apt description even if it is not technically accurate, and a
negative real Fed Funds rate counting inflation, the dollar will not
be able to gain permanent traction no matter the performance of the US

Despite much talk of the safe haven trade since the Japanese
earthquake, there has been no general move into the dollar or really
anywhere else in volume due to the Asian events.

Fear of capital loss is the driving force behind the safe haven trade.
During the acute phase of the financial crisis investors briefly
accepted negative returns on Treasuries for the perceived safety of US
government bills. Current fear of capital loss in the financial market
is muted, in the background due to recent history but not manifest.
Gold is lower post Japan; if there were any generalized safe haven you
would see it in gold

The one possible safe haven move has been to the Swiss Franc which
reached a new historical record post the Japanese event. That is
probably more a vote for safety and discretion of funds in Swiss banks
than a vote of confidence in the Swiss economy. But the Swiss Franc is
a relatively minor currency compared to the volumes of true safe has
flows that entered the US dollar and dollar assets during the fall off
2008, or from the euro when the dissolution of the single currency was
feared in the first blush of the debt crisis last year.

The main impact from the Japanese event, aside from the very emotional
reactions from to the threat of a nuclear cloud, has been the prospect
for slower world economic growth.

Different currencies are responding differently to the events in Asia.
It is not the dollar or dollar related considerations that are driving
the markets. The dollar is the other side of most currency trades so
what is actually Australian Dollar weakness shows up and can be
mistakenly interpreted as US Dollar gains

Yen strength prior to intervention had more to do with repatriation,
though amounts are difficult to quantify, existing market positions
and large stops below 79.80 executed Wednesday evening New York time,
(Thursday morning in the Antipodes), in typically thin Sydney/Auckland
liquidity. The move was entirely typical of trading in that market.
The beginning position of the yen well below 90 to the dollar owed
most to the residual of the collapse of the carry trade two years ago
which had originally carried the yen to its position below 100

Euro strength is due to several factors: recalculation of the euro/yen
crosses with a stronger yen (weaker dollar yen); the recent ECB rate
statements and promise of an April hike and the generally better
European debt picture.

Australian, New Zealand and Canadian Dollar weakness has been due to
their commodity currency status and the potentially slower world
economic growth from the Japanese events. In addition all three
currencies had been at or close to historical highs versus the dollar
so almost any major event whose outcome is unknown is a good reason to
take profit. There had also been renewed questions on China's ability
to maintain growth

The dollar is not putting up any much resistance to these developments
because it has an overhang of quantitative easing. Without the benefit
of the safe haven trade monetization is the fear stalking the dollar.
Even though US statistics are better the frozen Fed rate policy and
continuing QE will continue to negate any positive effects on the
dollar from US economic expansion.

Source: ActionForex.Com

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