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Foreign Exchange

Currency intervention gathers pace: Bank of Japan buys estimated $40 billion

The Bank of Japan has followed the Swiss National Bank’s action yesterday in intervening to slow the appreciation of its currency. While the SNB targeted near-zero interest rates, the BoJ has intervened directly in the currency markets.

Traders estimate that the BoJ may have bought $40 billion as it drove the yen from 77.20 to a high of 80.25. That makes it the largest ever solo currency intervention by the Japanese Finance Ministry. This is the third time in less than a year that Japanese finance minister Yoshihiko Noda has intervened in the market to sell the yen, pushing down its value against the dollar in particular. The yen’s refusal to rally even after a deal to raise the US debt ceiling was agreed on Tuesday (August 2), proved the final straw for Japanese authorities, analysts suggest.

Pressure from Japanese exporters has been mounting since the last coordinated intervention by the G7, which came after the Japanese earthquake in March. Back then, the dollar’s value was sent plummeting as investors feared a repatriation of dollars by US insurers after the catastrophic damage from the tsunami. Economy minister Kaoru Yosano says Japan is willing to intervene again following Thursday’s move, if there are further excessive market moves.

Traders report initially heavy buying on EBS, and then heavy concentrated buying from Japanese banks, while almost all sectors of the financial community have been selling into the dollar rally. As was the case with the SNB’s money-market intervention yesterday, traders are sceptical about whether currency or interest-rate intervention will work in the medium-to-longer term.

“If the Japanese and the Swiss are really serious about intervention, then they will need to impose capital controls. Anything short of that won’t prevent the market from taking them on,” says the head of G10 spot trading at a UK bank.

The BoJ has also increased its asset-purchase programme by ¥5 trillion ($65 billion) to around 1% of GDP, a move that will have limited impact, according to UBS strategist Gareth Berry. Still, another currency strategist warns against selling into the rally too early. Adam Cole, head of FX strategy at RBC Capital Markets, says sellers into the rally are relatively easy to identify: exporters and retail investors taking the opportunity to cover underwater yen shorts. But he concludes that fears of further rounds of intervention limit the outright downside in USDJPY, and that a period of range-trading is the likely net result.

As a result, he recommends selling volatility, such as USDJPY calls, as a more attractive strategy than spot trading in the near term. UBS, meanwhile, maintains a one-month USDJPY target of 85 and a three-month target of 90.

In the short term, traders point to the non-farm payrolls tomorrow (August 5) as a key determinant of the direction of the yen: 76.25 is seen as a critical level, traders say.

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