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Why This Time BOJ Intervention May Work

Last updated 10/30/2011 10:30 PM ET (GMT -5) 4 Comments

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Boris Schlossberg

Director of Currency Research, GFT

After weeks of warnings and jawboning  Japan finally intervened in the currency market tonight sending USD/JPY soaring by more than 300 points in matter of 30 minutes. Finance Minister Jun Azumi has repeatedly said that Tokyo would take "decisive steps" when necessary against the strong yen. "I have said many times, if forex moves do not reflect the economic fundamentals and speculative moves last, Japan will take firm measures," he told reporters earlier in the day.

Recent Japanese efforts at intervention have quickly failed with the initial moves often unwound in as little as a few hours. However, with USD/JPY reaching fresh post war lows of 75.31 in earlier Asian trade, Japanese monetary officials    may be much more determined to push USD/JPY higher than in their prior attempts. Having watched the successful efforts of the Swiss National Bank to keep EUR/CHF above the 1.20 level for more than a month, Japanese officials may decide to emulate those tactics and could proclaim a specific level of defense for USD/JPY.

There are several reasons to believe that this time intervention may be more effective. First and foremost the latest positioning data from the COT report has shown that specs had increased their yen longs by more than 26K contracts last week and tonight's action will likely create a a fury of short covering, especially if USD/JPY approaches the key 80.00 level. Secondly, latest US economic data has been surprisingly buoyant which should push US short term rates higher and it turn push USD/JPY higher as well.  

The one key threat to the long USD/JPY scenario is the persistently dovish rhetoric from the Fed. If US officials hint at further QE measures at this Wednesday’s FOMC meeting, they would undermine much of the intervention efforts of the Japanese.

For the time being however, the risk in USD/JPY is to the upside, as Japanese policymakers cannot accept record yen strength at the time when the country’s vital export sector may be facing serious decline in demand from the economically troubled Europe and slowing China. If BOJ shows strong commitment to this policy action USD/JPY could rise above 80.00 as the week proceeds.     

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Comments (4)

Darkdoji

October 31, 2011 at 03:40 AM ET

Great - but what then happens to risk while this is going on for the $ across the board? With no Franc as an outlet for so-called safe haven flows (and assuming from recent data the Fed decides to wait and see, re qe3) - are we saying the risk rally (which I now see many explaining off as a "relief rally") effectively on track to unwind? Is that the common experience/expectation. This is where experience comes in and I do not have that. Would be so glad to know the thinking of more experienced minds.

traderwillie

October 31, 2011 at 09:24 PM ET

RE: Darkdoji, I don't know who else might eventually check in here, but my perception is that risk would have to unwind. Certainly the BoJ becoming a persistent buyer of USD is going to affect other markets. And while there has been a tug of war between euor and usd, we know that the euro is still over valued by roughtly 30%. No doubt if that fundamental comes back into line where usd and euro are at parity, risk across the board is going to take a real spanking. And in terms of the fundamentals, I can't see how it won't happen. The euro may be worth slightly more than the buck, but not 30%.

Darkdoji

October 31, 2011 at 10:10 PM ET

Thanks T-Willie - makes sense. Actually pulled out of my long Eur/Chf with a tiny (very tiny) profit before the Eur started falling across the board (then froze so badly I did not take the ride down). Next I made the error of trying to fade the fall in reaction and mistimed it (always do) and now I am stuck 800+ Pips down still hoping it will retrace a bit for me to recover/cut my losses. I guess for the week one should be looking to sell risk on pull backs or event triggers. The recent volatility (last week) just messed my confidence - keep seeing swings either way even when my analysis suggests otherwise. I take comfort in our common perspective. Much obliged.

PS: Wish the market will return to "normal" - but this Euro deal/non deal and the currently event laden calendar favors breakout trades more than anything else. Cheers.

Darkdoji

October 31, 2011 at 10:42 PM ET

T-Willie, in fact the Yen intervention threw me off completely. Did not know what to expect after that and had come out of a weekend analysis that assumed the Euro would bounce at some point to retest the level from which it was falling. Did not know the market will show doubt with respect to the Euro this strong this early (even if I knew enough to know the Euro deal was well a non-deal) and certainly did not know anything after that USD spike early Monday. I had been doing ok before then - but there are things that only experience can allow. Most analysts maintain a non-committal style (I guess out of fear of losing face if they come out wrong and many times they clearly have no clue whatsoever), so that they end up being reporters of "news" and very little help as guides to the market. Really appreciate your thoughts up there.

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.