BOJ Intervention In Currency Market Likely

The Japanese Yen reached a new all-time high against the U.S. dollar fuelling speculation that the Bank of Japan will forced to intercede to ward off speculators. With the prospect of repatriation of profits back to Yen, the currency has risen to 79.75 to the USD even as equity markets have plummeted. This is well off highs for the session. The Yen traded as high as 76.36, which is way above the previous post-war high of 79.75 where it is now trading. In the equity markets, after the largest two-day sell off since the 1987 crash to start the week, the Nikkei 225 put in a +5% performance today. However, with Thursday trading already underway in Tokyo, the Nikkei is down over 3% right now. At it’s worst, the index was down 4.7%.

Win Thin says these currency moves are likely speculative in nature and will invite a response:

The move in dollar/yen has been eye-popping. It is certainly a bit exaggerated from thinness in the markets as it came in that period after North American closed up and before Asia was fully on board. Still, the violence of the move will raise eyebrows at the BOJ, and while we have been on the fence about possible intervention on a slow grind lower, the sort of move seen today is certainly disorderly and BOJ intervention would likely be seen within G10 as justified. Earlier, newswires were reporting that Japanese officials have found repatriation by insurers to be relatively negligible. This fits in with our view that the flows into yen are largely speculative in nature, and we believe that intervention would appear to be more likely if yen strength is indeed a function of speculation (perhaps front-running expected repatriation) rather than actual repatriation flows. We are not sure how much of a concern the strong yen is for Japan officials right now given all the other problems facing the nation, but we suspect a violent move towards 75 will get their attention. If nothing else, the BOJ could intervene today just to send a signal to the specs that this is not a one-way market. Otherwise, the specs will simply feel emboldened to push the yen even higher.

Clearly, volatility is the watch word on the situation in Japan. More updates will come as I get them. You can follow me on twitter for more live commentary.