Threat Of Multilateral Intervention In Currency Markets: G-7 Singles Out Yen For 'Excessive Volatility'
- Oct 27: G-7 finance leaders singled out the yen, saying its recent "excessive volatility" threatens the global economy and financial system; meanwhile, Japan indicated it may take action to halt the yen's advance - Vice Finance Minister Sugimoto said government was prepared to act 'quickly' in the currency market
- Neil Mellor of BofNY said possibility of multilateral intervention in currency markets could happen at anytime, but it would achieve its maximum impact were it is seen to be led by the US Treasury - NY morning today (Oct 27) could therefore provide an ideal opportunity for them to make a clear statement of intent
- Oct 24: Yen hit 13-year highs against the dollar, reaching 93.18, and a six-year peak against the euro as panic gripped global markets and forced investors to abandon risky positions. Yen/USD briefly hit 90
- Falling commodity prices and risk aversion, not economic fundamentals, is behind the yen's resilience
- Lex: Mood music for yen remains good, with currency still undervalued in real trade-weighted terms. Global investors continue to unwind yen-funded carry trades. Japanese retail investors – who, says RBS, hold $600bn worth of foreign currency denominated assets – are switching back into yen owing to burnt fingers; but questions over continuing strengthening remain since Japan is teetering on the brink of recession and its banks are exposed to tanking stock market and mushrooming bankruptcies
- Sasaki of JPMorgan (via Bloomberg): Yen may advance to 95 per USD should Japanese investment trusts, insurance companies and pension funds start selling foreign holdings
- Halpenny of Mitsubishi UFJ (via Bloomberg): Yen won't likely be harmed by global efforts to revive financial markets; 45% decline in Japan's Nikkei 225 index in past 12 months (to mid-Oct) has been more severe than U.S. or European markets, leading to reduced risk appetite within Japan and to new repatriation of assets
- Yen typically strengthens as global risk aversion rises - 1) yen seen as a relative safe haven currency due to Japan's low inflation and trade surplus; 2) Japan has very low interest rates, making yen perfect for "carry trade", in which investors borrow money in a low-yielding currency to invest in a higher-yielding asset. When aversion rises, investors buy back yen they have borrowed
- While USD/JPY can spike lower in times of extreme risk aversion, it cannot stay below 100 for long due to Japan's declining financial home bias; 110 for USD/JPY makes more sense than 90 (Jen)
- Unicredit: Fair value for USD/JPY is 102 but risk aversion to keep JPY overshooting
- JPY/USD may fall below 100 in event of a dollar crisis, but won't stay there in the long-term due to 1) economic decline from demographic shift, 2) large interest rate gap, 3) yen failing to become key reserve currency, 4) declining home bias of baby boomers (Mitsubishi UFJ)
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