Potential for Further Japanese Intervention Spooking Market

Thursday, 30 September 2010

Today is the end of yet another month this year, and as such – markets are breathing a slight sigh of relief. Only three months to Christmas holidays (2 months for some) – and ultimately that's only 8 weeks away.

However, we are still mid-week, and as such there is still work to be done, especially on the currency front.

Today, the main theme in the markets has been the weakening USD. The dollar continues to underperform against almost all of its crosses – namely the USD/JPY and EUR/USD. Despite this however, the losses for the USD/JPY haven't been as severe as they have been for other currency pairs.

This might be due to the renewed concern about the potential for Japanese intervention in the Forex markets. Currently, the Yen is trading at 83.59 – which whilst still far above the low the currency pair reached earlier in the month, is still at a modestly daunting level. The Japanese are sure to be keeping their eyes fixated on this cross for any further weakness (i.e. Yen strength) which might pop up.

As far as daily movements go, as at 2:29pm JST (the time of writing) – the USD/JPY had moved lower by 0.2% and this equals out to a move of 0.7% lower for the entire month. That begs the question – what would have been the monthly decline if the Japanese central bank chose not to intervene?

On the topic of intervention, we all know that the tolerable level for the Japanese is around the 82.50 level on the USD/JPY. However, some market commentators have revised that level upwards slightly in the last few days – seeing the central bank or the Foreign Ministry intervening at the 83.00 level or even higher. That is why the market is so nervous at the current time, given that the currency pair is only 59 pips higher than that level.

Additionally, many investors and market participants are saying that future intervention will be harder to spot. Instead of coming out and making a huge market shifting purchase of USD, the Japanese central bank might choose to trickle funding in to the market throughout the course of half a day or so.

This would surely make intervention by the Japanese Foreign Ministry less conspicuous – and could perhaps catch some traders out. Either way, we will wait and see what comes of the USD/JPY and all USD and JPY crosses in the month of October.