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Foreign Exchange

Currencies: What a difference a month makes

Oh, how recently it seems I was writing about the likelihood of coordinated FX intervention to prop up the dollar. It still seems that intervention is being considered, although the market has yet to consider it a real threat.

But over the past week, Australia has waded in to buy AUD, especially against the JPY, and the G7 is trying to jawbone some stability into the market. Bank of Tokyo-Mitsubishi UFJ distributed an interesting item this week. It says: “The simultaneous decline in US Treasuries and equities however remains a worrying signal, and a deflationary one. We recall the period of ‘Japan selling’ that accompanied the tail end of Japan’s own banking crisis, and remain watchful of similar implications for the US bond market.”

It adds: “There appear to be other reasons than these fundamental drivers that have caused international concern about the distortive effects of the yen’s speedy ascent. Many market participants have drawn the linkage between the joint sell-off in US stocks and bonds and volatile drop in USD/JPY and point to the unwinding of FX-linked bond derivatives, which some fear might compound systemic risk. We cannot help but notice that the one-year correlation between USD/JPY and the S&P is not the only one at multi-year highs; the correlation between 10-year Treasuries and USD/JPY is also at exceptionally high levels, as is the inverse correlation between USD/JPY 3m vol and 10-year Treasury yields.”

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