First Japanese Intervention Since 2004 Sent Yen Sharply Lower

September 15, 2010

On the Ministry of Finance’s instructions, the Bank of Japan sold a reportedly heavy amount of yen against dollars said to have exceeded $10 billion equivalent.  Finance Minster Noda confirmed the unilateral operation and implied the injected liquidity would not be withdrawn from the money market.  No other central banks have intervened.  The BOJ began intervening in Asia and is rumored to have continued selling yen in Europe.  Finance Ministry officials said there will be more intervention as needed in this escalated fight against deflation.

Dollar/yen shot up as much as 3.2% from 82.87 per dollar to 85.54 per dollar and is currently 2.6% stronger than at Tuesday’s close in New York.  When Japan last intervened to weaken the yen in mid-March 2004, it was trading around 110 per dollar.  According to market myths, intervention is most effective when not sterilized and when done simultaneously by many central banks.  If Japanese officials do as they say, these operations will meet the first condition but not the second.  In my observed experience, the main determinant of effective versus unsuccessful intervention is whether the prior perceived currency misalignment reflected excessive speculation or was based upon fundamentally-driven flows.  In Switzerland’s case earlier this year, intervention failed to stem the franc’s rise.

The dollar also recovered 0.7% overnight against the Swiss franc after dropping below unity to as low as CHF 0.9947 and gained 0.6% against both the kiwi and Aussie dollar.  The dollar is 0.2% stronger against the euro and sterling and up 0.1% versus the Canadian dollar.  The Chinese yuan edged up another 0.1%.

Japan’s Nikkei responded to the intervention with a 2.3% advance.  Elsewhere in the Pacific Rim, stocks rose 3.9% in Indonesia, 0.8% in India and Australia, 0.7% in Singapore, 0.5% in South Korea, and 0.4% in Taiwan, but Chinese equities sank 1.8%.  In Europe, the Paris Cac and German Dax are 0.4% lower, and the British Ftse is off 0.2%.

Ten-year JGB yields slumped back nine basis points to 1.05% on the unsterilized intervention, while 10-year German bunds and British gilts rose by two bps.  The Portuguese EUR 750 million one-year T-bill debt auction produced disappointing results, a higher 3.37% yield and a significantly smaller 1.6 bid:cover ratio.

Oil prices dropped 1.3% to $75.77 per barrel, while gold, which struck a new high Tuesday of $1274.75, edged down 0.1% to $1270.60 per ounce.

Tea Party candidates scored several surprise victories in U.S. Republican primaries, including the race for New York State governor.

Advisors to the Peoples Bank of China spoke of a need for a more normal monetary policy.  Before this past weekend, speculation had arisen that the central bank might lift interest rates then.  Unlike several Asian monetary authorities, the Chinese so far have used administrative guidance rather than raising interest rates to cool economic growth.

Australian consumer confidence weakened sharply to -5 in September from +5.4 in August.  Australian housing starts rose only 0.8% last quarter, considerably less than consensus forecasts, but were still 43.8% greater than in the second quarter of 2009.

Retail sales in Singapore rebounded 3.2% in July but remained 1.2% below year-earlier levels.  Non-auto retail sales were 6.0% greater than in July 2009.  South Korean unemployment fell in August to 3.4%, a three-month low, from 3.7% in July.  Turkish unemployment in June of 10.5% was 2.5 percentage points lower than a year before.  Turkey posted a USD 3.4 billion current account deficit in July with a $5.4 billion shortfall in merchandise trade.

Final Euroland consumer price data confirmed a 0.2% monthly uptick of the CPI in August and a 12-month inflation rate of 1.6%, down from 1.7% in July but up from a drop of 0.2% in the year to August 2009.  Core inflation remained at 1.0%.  Total inflation was at 1.0% in Germany, 1.2% in the Netherlands, and 1.6% in France but at 5.6% in troubled Greece.

Employment in Euroland was unchanged for a second straight quarter in 2Q10.  The on-year decline fell, however, to 0.6% from 1.2% in the year to 1Q and 2.3% in the year to 3Q09.  Job in Germany were 0.2% higher than in 2Q09, but in Spain and Greece, such posted on-year declines of 2.4% and 2.3%.

Italian consumer prices rose 0.2% in August and by 1.6% from a year earlier.  Czech producer prices slid 0.4% in August and were 1.8% higher than a year before.  Denmark’s WPI was flat on month and 5.1% higher on year in August.

The Swiss ZEW expectations index of investor sentiment weakened sharply in September to -5.1 from +9.1 in August, mirroring deteriorations previously reported in Germany and the euro area.

The U.K. labor market has taken a turn for the worse.  British unemployment rose 2.3K in August following claimant count-basis drops of 1.0K in July, 15.9K in June and 31.1K in May.  The claimant jobless rate held at 4.5% for a third straight month.  The ILO-basis unemployment rate was 7.8% in May-July versus 7.9% in February-April.  Wage earnings rose only 1.5% in May-July from a year earlier and 1.8% if bonuses are excluded. 

Minutes from the Swedish Riksbank’s September 1 policy meeting revealed the influence of seemingly lessening prospects for Fed and European central bank tightening on the likely rate path in Sweden.  That influence works through two channels: 1) implied softer global demand and 2) a need to avoid excessive krona appreciation as a result of widening Swedish interest rate premiums.

Scheduled U.S. data today include industrial production, the Empire State manufacturing index, import prices and weekly oil inventories.  Canada will be reporting the monthly manufacturing survey results and existing home sales.  Opinion is divided over whether the Reserve Bank of New Zealand hikes its 3.0% Official Cash Rate tonight.  Other central bank decisions Thursday will be announced in Switzerland, Chile, India and Turkey.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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