FX markets deal Japan another blow

By Felix Salmon
March 16, 2011
this one would be a monster -- the yen managed to strengthen by 4% against the dollar and almost 6% against the Australian dollar in a matter of minutes.

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If FX moves were measured on the Richter scale, this one would be a monster — the yen managed to strengthen by 4% against the dollar and almost 6% against the Australian dollar in a matter of minutes.

This move is overwhelmingly due to technicals, rather than fundamentals: you don’t get jumps like this because people have donated a few million bucks in aid which is now being converted to yen. It’s not even because Mrs Watanabe is cashing in her high-yielding Aussie dollars because she needs the cash in yen right now. No: this is a prime example of how even an economy the size of Japan can be buffeted hard by international capital flows in the multi-trillion-dollar FX market.

The Japanese currency is now stronger than it has been at any time since WWII, at exactly the point at which it needs to start cranking up its export engine. And on the face of it the move doesn’t make a lot of sense: countries’ currencies are just as likely to fall in the wake of a natural disaster as they are to rise.

But what we’re seeing here is a function of ultra-leveraged hedge funds unwinding their carry trades. If you borrowed yen and invested in higher-yielding currencies like the Australian dollar or the South African rand, you made lots of money so long as the rate of appreciation of the yen was lower than the interest rate you were getting in the target currency. But when the yen starts to appreciate dramatically, you get margin calls, which force you to buy a lot of yen in an illiquid market, which in turn drives the yen up even further, which in turn not only increases the size of your margin call but also triggers a large number of stop-loss orders and other triggers embedded in exotic FX options. The result can be massive, as we’ve just seen.

The G7 is reportedly going to try to help out “to support financial stability in Japan”, but it’s far from obvious what they can do: currency intervention is rarely effective when you’re trying to push against the direction markets naturally want to go. It seems that Japan, after being hit first by an earthquake, then by a tsunami, and then by nuclear disaster, is now going to have to suffer the effects of a volatile and overvalued currency as well. It’s the last thing the country needs, and it does help bolster the case for some kind of Tobin tax.


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Japan is a country that has to import its raw materials. A stronger Yen helps Industry rebuild and Mrs. Watanabe buy the lumber and appliances for her uninsured house: only about 14% of property owners seem to hold homeowners insurance.

Posted by paintcan | Report as abusive

if g7 steps in and intervenes in fx market, all they are doing is bailing out the speculators who are caught on the wrong side with their carry trades. is this really something g7 should be doing? let the market punish the speculators first. usd/jpy will go to low 70′s and then step in to bring back.

Posted by yenguy | Report as abusive

I’m not sure why intervention is necessary. The rise is surely short-term and technical and the fundamentals will almost certainly win out sooner rather than later and bring the yen down appropriately on their own. As yenguy says, why would we want to bail out the speculators anyway?

Posted by right | Report as abusive

on external hand: yen determined by us economy and yield of tnote
on internal hand: yen determined by capital flows

Posted by dennis.jung | Report as abusive

I saw that the Yen had rallied about 400 pips on the open. But it looked like it gave back most of that gain by the time the Nikkei opened 2 hours later.

I agree with the Reuters article that liquidity is worsening. The liquidity in the CME’s JPY futures contract has definitely gotten much worse this week.

imho one problem is the fact that Bloomberg’s quote for the 3-month JPY forward bears little resemblance to the actual price at which trades are occurring. This may be a sympton of the illiquidity or it may be partly the cause.

Perhaps the volatility of JPY forwards is due to the BOJ’s three recent interventions.

Or, more sinisterly, the forward’s volatility is due to banks (like UBS) misreporting their prices to the BBA and to Bloomberg (like they misreported Libor in Fall 08).

At any rate the volatility of JPY tenors is a good reason for market-makers to be much more cautious — and of course to widen their markets, which adds to volatility, which leads to wider markets, ad infinitum.

Lastly, any problem involved clearing trades during the Asian session may require help from persons in Tokyo (instead of Sydney). And that too is proving problematic.

So, one of the most typically liquid markets in the world is looking like it did during the week Lehman & AIG died. And that’s worrisome.

Posted by dedalus | Report as abusive

And where is the evidence to support such a conclusion?

Posted by Tseko | Report as abusive

Felix – if a Tobin tax were adopted, the amount of currency trading would likely be reduced, since it hits hardest against speculators. This would in turn hit those service providers to the currency trading industry. One of the biggest which is your employer. Not sure you need to disclose this, as your employment-oriented vested interest might be to resist a Tobin tax. But a related consideration nonetheless.

Posted by nicfulton | Report as abusive

Felix I hope you lose your job over your other article on japan. You are truly one heartless person

Posted by Radelta | Report as abusive

The moderation of these comments is clearly politically motivated and geared towards squelching any criticism of the mythical “free press” and all the corporate military-industrial lies it allows into the first draft of history. I hope the New York Times vanishes into the dustbin of journalistic history where it belongs. Moderators hands off the comments section!

Posted by Greenfelder | Report as abusive

yenguy: Speculators are driving the Yen stronger. G7 intervention will cause them serious losses. If that’s your idea of a bail-out, you better go back to school.

Felix: A Tobin tax? You can’t be serious.

Posted by Elektrobahn | Report as abusive

Not one Japanese Skyscraper collapses after a 9.0 quake but 3 Trade Center buildings collapse neatly into their foundations? Garbage!

Posted by Greenfelder | Report as abusive

Greenfelder, the World Trade Center buildings did not collapse from the impact of the airplanes. They collapsed only after the raging inferno of burning jet fuel melted the support columns — even then, it took a while.

Posted by TFF | Report as abusive

Oh my God! TFF you really are completely brainwashed by the Journals of Record, their Amen corners and the Bush gang! Jet fuel is like diesel you can put a match out in it! even then it doesn’t burn at anything like the temperature required to melt structural steel and collapse a building neatly into its foundation. You must be reading the New York Times to believe lies like that. No plane or jet fuel ever touched building 7, but it totally collapsed. come on.

Posted by Greenfelder | Report as abusive

As you wish, Greenfelder…

I’m willing to bet that my understanding of Chemistry surpasses your own, however.

Posted by TFF | Report as abusive