Will the Bank of Japan Intervene in the Japanese Yen? (page 1 of 2)

DailyFX Fundamentals 01-23-08

By Kathy Lien, Chief Strategist of DailyFX.com

Where to Park Your Dollars During a Recession

The leading story in the currency markets today is the US dollar and how it has fallen to a 2.5 year low against the Japanese Yen. However the 600 point intraday swing in the Dow has completely turned things around as risk appetite remains the predominant theme in the currency markets. Yes, the Federal Reserve is cutting interest rates, but what everyone is focusing on is whether the Federal Reserve's rate cut will lead to similar moves by other central banks. If we are truly in a recession like many economists argue, then the dollar could actually strengthen. According to a study that we will publish later this week, over the past 30 years, there have been four recessions in the US economy. The dollar strengthened against the Euro (Deutschmark was used prior to the Euro's inception) during three of them. The one time that the dollar lost value was 2001, which is also the most recent case of a recession. Of the seven major currencies, the safest one to park your dollars in is USD/CAD. The biggest drop in USD/CAD was during the 1980 recession and that only resulted in a 0.08 percent decline. US stocks staged a dramatic recovery today, providing evidence that the Federal Reserve's emergency rate cut is working. However the 75bp of easing is only a start. Yesterday, we said that Fed Fund futures are pricing in another 50bp rate cut on January 30th. Now, they are toying with the idea of a back to back three quarters of a point drop. When stocks were down as much as 300 points, the futures were pricing in a greater chance of a 75 versus 50bp rate cut. With stocks closing up 300 points, there is a 92 percent chance that we will see 50 versus 75bp of easing. One way or the other, another big move is expected. The Fed has already made their down payment, now the markets want them to choke up the full amount. Existing home sales, the only potentially market moving number on the US calendar is due for release tomorrow. The housing market continues to be one of the most vulnerable sectors of the US economy. Therefore we do not expect the data to be dollar positive.

Will the Bank of Japan Intervene in the Japanese Yen?

Carry trades and the Dow are both trying to find a bottom and today's move may be success in the making. All of the Yen crosses staged dramatic intraday recovers, but will these gains last? We have mentioned on many occasions that carry trades thrive in 3 environments; low volatility, strong risk appetite and global tightening. Unfortunately the current market environment does not satisfy any of these qualifications, which is why we believe that even though carry trades may rebound further over the next 24 hours, they should continue to suffer over the medium term. As the Yen continues to strengthen, particularly against the US dollar, many people are wondering whether the Bank of Japan will intervene in their currency. We believe that the uncle point for the BoJ in USD/JPY continues to move lower. It use to be 110, then it became 105 and now that level is probably at 100. Yesterday, Finance Minister Nukuga said specifically that the government is not thinking of large scale forex intervention. Today's move also reduces the need for one.

Euro Helped by Hawkish Comments from Trichet

Earlier losses in the Euro today were contained by hawkish comments from Trichet. The central bank President reminded traders that even after the sharp moves in global stocks, they stand committed to fighting inflation.