Inquiring minds are once again watching central banks intervene in the forex markets. Please consider Yen falls after G7 deal, further downside seen

Japanese Finance Minister Yoshihiko Noda said Japan agreed with central banks of the United States, Britain and Canada as well as the European Central Bank to jointly intervene in the currency market, the first joint action in over a decade.

The dollar jumped nearly 3 percent on the day to as high as 81.48 yen, extending a rebound from a record low of 76.25 yen plumbed on Thursday. The selloff in the previous session came after a break of the 1995 record low of 79.75 triggered a cascade of automatic sell orders in thin trade.

The yen has climbed steadily since last week’s earthquake, as Japanese and international investors closed long positions in higher-yielding, riskier assets such as the Australian dollar, funded by cheap borrowing in the Japanese currency.

Expectations that Japanese insurers and companies will bring money home to pay for claims and reconstruction also contributed to the yen’s strength.

Some analysts doubted any intervention would be effective, given past experiences by the Bank of Japan and the Swiss National Bank.

“Intervention is no panacea. Everyone knows it. Japan has a much bigger credibility problem and that’ll weaken the impact,” said David Gilmore, a partner in FX Analytics in Essex, Connecticut.

“I don’t think we’ve seen the low in the dollar/yen. There’s still a lot of carry trade exposure. The world is really levered up on this.”

Yet, other analysts said intervention may be more effective this time than it was in September when Japan spent $26 billion to weaken the yen but failed to ensure a lasting dollar rally.

“This entire move can be pinned down to speculative positioning rather than any repatriation flows,” said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi.

“Since it is speculative, intervention in this case should work and clear out some of the long yen positions.”

Currency Interventions Never Work

Several people asked me to comment on this. I am not sure what I can add given my stated position that “currency interventions never work”.

However, to add some color, I will say this is an act of desperation as well as a sign of hubris by central bank clowns to think they are more powerful than the markets.

Short of complete self-destruction, no one can defeat the primary trend. They can slow it down, or temporarily buy some time but not reverse it.

That said, central banks certainly can enhance the current trend. Indeed, asinine policies by the Greenspan Fed certainly made the housing bubble much larger than would have happened otherwise.

Thus, there is always a slight chance that by accident, central banks step in at precisely the right time (as a trend is about to reverse on its own accord), giving the appearance of intervention success.

Could this be one of those rare instances central bankers step in at the right time? I suppose so.

Nonetheless, as I said just yesterday in Wild Moves in Yen; Best Move for Japan is to Not Intervene; Yen Hits Record High; Carry Trade Blows Up, the best thing for central banks is to leave this alone.

Best Move for Japan is to do Nothing

Currency intervention has not worked ever. Pray tell what good did it do Japan to throw $25 billion at the Forex market in September?

The answer is none.

History has proven time and time again that fighting currency trends is futile. Thus, the best thing Japan can do with the Yen is to not do anything at all. Yet, foolish cries for intervention still persist.

If that gap fills quickly with no intervention from the Bank of Japan, the blast higher is quite likely to be an exhaustion gap, signifying the end of the trend.

Clearly the jackass central bankers did not listen. Thus we have a completely distorted chart as shown below.

Yen 20-Minute Chart

click on chart for sharper image


Is this a trend change? How the hell does anyone know? I don’t. What I do know is the G-7 intervention has distorted the market, potentially sending false signals that cannot possibly do any good.

However, if you want a guess, we have seen the highs for this move in the Yen.

Moreover, and ironically, my bet is we see intervention in the reverse direction in years to come as Japan struggles to fight rising inflation with a debt-to-GDP ratio ill-equipped to handle interest rate hikes to stabilize the Yen.

Mike “Mish” Shedlock
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