Coordinated Intervention Stokes Risk Appetite

BBH CurrencyView

• US dollar weaker against G10 currencies except yen and Swiss
• Coordinated G7 intervention weakens yen
• Risk appetite improves on intervention, despite UN approved no-fly zone for Libya

The dollar is mostly weaker except against the yen and Swiss as risk appetite has increased today. The talk regarding the nuclear situation in Japan leads to hopes of stabilizing the situation, and G7 leaders agree to intervene to weaken the yen. The yen is about 3% weaker against the dollar at 81.40 and the Swiss is down 0.5% as risk-aversion trades get squared off. More broadly, the dollar is weaker against most other major and emerging market currencies, falling around 0.5% against European currencies and over 1.0% against the Australian and New Zealand dollars. EUR/USD has firmly broken above the key 1.40 level, currently trading around 1.4100. Sterling is underperforming, following weak data and BOE member comments. CAD is stronger on the day, little changed by lower than expected CPI data this morning. Global equity markets and futures prices are higher led by a 2.5% increase in the Nikkei. European indices are up between 0.5 and 1% while S&P futures are pointing to a 0.7% higher open. Global sovereign debt yields are somewhat lower. Oil prices are up 1%.

Coordinated G7 intervention to counteract “excess volatility and disorderly markets” was announced. The BOJ, Bundesbank, BOE and Bank of France have entered currency markets selling yen against the dollar and euro, and the Fed may intervene as well during US trading. The yen weakened as much as 3.5% versus the dollar, reaching the 82 level, and a similar percentage move was seen versus the euro. This is the first coordinated intervention since September, 2000, then to defend a falling euro, although the BOJ intervened to weaken the yen last September to that point. Three elements may increase the odds of success of this intervention. First, that it is coordinated with other central banks. Second, the BOJ is in the midst of dramatic easing of monetary policy through doubling the size of its asset purchases and now agreeing to buy the reconstruction bonds the government will sell. Third, market positioning among speculators may have caught the market leaning the wrong way. Speculators will be testing the central banks to determine the levels and strength of their pursuit of a weaker yen. Since the intervention, USD/JPY has held above 81.30, the level to watch. The outcome of the race to prevent a more serious nuclear incident will also be a major factor for the yen.

The G7 intervention has improved appetite for risk and led to the unwinding of some recent safe haven flows. Although off its lows from shortly after the announcement of intervention, the Swiss franc remains weaker versus dollars and euros, commodity prices are higher, as are global equities. The euro, having tried and failed several times this month to stay above 1.40, has hit the 1.41 level, and is now at new highs since last November. Periphery yields are acting well today with most spreads over German yields mostly flat. News regarding the UN’s approval of a no-fly zone over Libya and Qaddafi’s claim that a big battle is coming “within hours” are limiting investor inclination to take on risk policy can’t be kept over the policy horizon. Sterling is much weaker this morning, by ½% against the euro, following a poor Consumer Confidence number for February, a record low, and comments from BOE/MPC member Bean. Bean, often considered a hawk on rates, says he favors delaying interest rate increases due to the uncertain rate of recovery from “a very deep recession indeed”.