No Surprise from the BoJ

The EUR and JPY took it on the chin from all quarters in the O/N session, but for two very different reasons. The EUR fell the most in a month outright, amid speculation that European leaders will struggle to “garner financial support for their revamped crisis-fighting plan” as capital markets shift their focus of attention from Greece to Berlusconi’s precarious position in Italy.

The yen, on the other hand, as predicted on Friday, was the subject of intense direct intervention by Japanese authorities. The currency fell the most in three years outright as the BoJ stepped into foreign-exchange markets to weaken the currency for the third time this year, after its gains to a postwar record threatened exporters. The authorities cited that the “speculative moves” in the currency failed to reflect Japan’s economic fundamentals.

The BoJ initial intervention started just after the Tokyo “fix”, pushing the dollar from 76.70 to just under 79. Speculators and exports have been strong sellers around the highs, forcing authorities to be large bidders during their second wave of intervention. The initial estimates for the BoJ has been more than $50b. Has the BoJ failed? USD/JPY is well off its highs, trading around 78.00. Intervention occurred just after printing a new intra-day low, tempting a few technical analysts to suggest that the government wants to defend 75-76 level. Why here? This is below the summer intervention levels. The BoJ will have to remain ‘directly vigilant’, otherwise their currency is in danger of trading pre-intervention levels again.

Will Japan follow the SNB route and establish a “floor”? Globally, it would be politically unacceptable, as the Japanese economy is the world’s fourth largest exporter, at +4.6% of global exports, while Switzerland, at number twenty-one, commands +1.4% of the export market share. No G20 member would want Japan to set an Asian “floor” precedent. The fundamental pressure for yen appreciation remains intact. Japan’s trade balance surprised strong last month and is expected to return a small surplus within the coming months. However, recycling this surplus out of yen should remain unattractive for Japanese investors given both the Fed and the ECB are likely to enter an easing cycle. It seems that Japan will have to rely on “ the continuing improvement in the global macro cycle” for longer term relief.