FX intervention

Monday, October 27, 2008 | posted by RedApple
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The stock markets are down again today. FX market is also falling apart in sympathy. I thought that it is important for this blog to take a deep breathe and have a look at these returns:

Currencies ranked returns:

I spoke with a good friend of mine today talking about the possibility of currencies interventions (see Japan will likely go it alone in FX intervention) . He suggested that even though every one wants stability in the FX market. There are two kinds of intervention. Those who are trying to weaken their currencies and those who are trying to do exactly the opposite. The latter have a much harder task since they need to buy back their currencies using their reserves and there is a limited amount of that (case in point: Asian Crisis). As for Japan to intervene, it is a much easier task since they just need to print a lot more money in the market.

Personally, I think that the Japanese downward spiral is in place. Nikkei is looking at stronger Yen and downgrading the exporter's earnings. Yen is getting stronger because of fear linked to equity unwinds, de-leveraging and carry trade unwinds. Given the uncontrolled FX trading activities from hedge fund to companies (for example Citic Pacific in Hong Kong), we may indeed see more risk aversion from the popular trades. Although I must admit that at 55.82 AUDJPY and 115.61 EURJPY, carry trades are closed to washed out in the market.

Even though we want FX interventions, the question is 1. if it is going to happen, 2. if it is going to be successful. I believe that FX intervention will happen because FX volatility does not induce global trades and it is in all countries' interests to dig out of this recession. However, due to the shrinking FX reserves in a lot of the emerging market (and non-emerging too , look at Korea) from recent interventions, the power to limit moves are shrinking too. On the other hand, as explained earlier, I would not bet again Japan being successful. I think that 85-90 USD/JPY should be well supported.

A stable and well defended Yen is much needed in this market.