Intervention and the AUD

See the latest Australian dollar analysis here:

Macro Afternoon

AUD/JPY and USD/JPY are up sharply at present on the back of comments from Japanese Finance minister that G7 countries will intervene to support the Dollar (sell Yen). There is also talk they will buy stocks which is what the HKMA did during the Asian crisis.

The New York Times just sent a release out saying:

The United States and other major economies will join Japan in a highly unusual effort to stabilize the value of the yen by intervening in currency markets, the Group of 7 nations announced Thursday night in a joint statement.

Do not under estimate the power of G7 when it moves together. Single country intervention often fails but when the Fed and other Big Central banks get involved markets move out of the way. Which is exactly what we are seeing in Asia right now.  I had expected intervention once the USD/JPY broke the post Kobe lows but I didn’t think it would take as long as it did nor USD/JPY drop as low as it did. But G7 is in because it does not want Yen strength to destabilise other currencies. The last thing Japan needs right now is an effective tightening on top of all its troubles from an appreciating Yen. Below is a chart of AUD/JPY showing the move.

AUD/USD is sharply higher as well on this news as the chart below shows. Word on the street is that offshore names were in buying short AUD bonds last night so they’ll be very happy with their capital gain today. Price action in AUD/USD right now is attached.

On the talk of Japanese authorities buying shares which is effectively intervention in the Nikkei. This is how the HKMA fought of the speculators and calmed the market in the Asian crisis. My personal view is that this is a superbly effective tactic in calming the markets across the board. Nikkei is now up 2.84%
There are of course no guarantees these moves will work given the tensions in markets and concerns over potential new problems, but the G7 is a powerful force still in currencies and not to be trifled with usually.

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  1. Quick question: From the announcement, would FX markets then not position themselves to profit “free lunch” from the information, therefore undoing the Q7’s strategy?

    • Deus Forex Machina

      Sometimes the Government needs to protect the real economy from markets and their avarice. G7 doesn’t intervene much only when there are massive misalignment or the risk that there will be. Such was the case this week and I support it.
      It’s like the RBA intervention in the AUD, not something we see often but only when the market is or risks becoming disorderly.

      • I think the RBA are always dabbling in the AUD without announcing it – it makes a fair bit of money selling surplus when values are high and buying up when it is cheap.

  2. Daily Yen volume traded globally is around $750Billion (US) of the daily $4Trillion market. If the market wants to long Yen it will I doubt the G7 has pockets that deep.

    • Deus Forex Machina

      True in the sense that markets are too big for the Central Banks on their own but they are not trying to draw a line in the sand at some arbitrary level. rather they are just trying to signal two sides to the trade (like the RBA does – because it is certainly not big enough) so USD/JPY selling didn’t become a disorderly rout and disrupt other currencies and asset markets.
      BOJ sold 1 Trillion Yen but remember they can just keep printing the stuff if they really want to. It’s their currency.