Coordinated G7 Intervention

March 20 2011 by Spencer McKay in Forex Release |No Comments

Around 9.00am Tokyo time the BoJ began intervening in the FX markets after agreeing to a corrodinated effort with the G7. USDJPY traded to an initial high of 81.00 from 79.20 on the early buying but then powered ahead to 81.99 as trading began to spread and further comments were issued. The G7 group statement expressed its “readiness to provide any needed cooperation,” and said it “will cooperate as appropriate”. There were uncomfired Jiji (a Japanese news agency) reports quoting markets sources that the BoJ had spent $10bn on this intervention. Keeping the pressure on, Japanese Finance Minister Noda stated that other central banks would continue the intervention throughout out the day.

We are now hearing official confirmation that the Fed, ECB, BoE, and BoC participated in coordinated physical FX intervention with the BoJ (SNB stated they would not comment on their involvement) rather than just providing verbal support. Interestingly there are suggestions that interventions were on the actual accounts of the intervening authorities and not just on the BoJ account. As we had stated in yesterday’s newsletter, we believed that the conditions were right for a G7 response, so today’s action was not a total surprise.

The obvious question is whether FX interventions can be successful with the recent Japanese and Swiss failures fresh in our mind. Unlike recent past interventions which were unilateral and limited in duration (G7 EUR intervention in September 2000 was a singular day) this round looks to be highly coordinated and sustained. We suspect that while Japan struggles with the nuclear reactor disaster, participating countries will likely continue to intervene in the coming days.

The news flow from Japan remains confusing at best but there seems to be a slight bright spot emerging. Japan’s nuclear safety agency reports that the electrical and cooling systems have been restored to reactors #1 and #2 today, and will be restored to reactors #3 – #6 by 20th March. In addition, the W.H.O released a statement that the radiation spread in Japan is localized and not harmful to human health. Regional equity markets rallied with the Nikkei leading the pack up 2.72%, and the positive sentiment has certainly filtered into the European session. Overall there is a fragile calm over the markets with FX vols falling sharply and EM currencies and interest rates easing back.

Oil was one of the exceptions, trading up $2 on news that the UN Security Council finally authorized military action against Gaddafi and no fly zone over Libya. The sabre rattling by international forces seems to have had an immediate effect with a DJ headline stating that Gaddafi was ready for a cease fire but must agree on “technicalities”. On a final note, in an interesting but widely overlooked event, German parliament rejected Europe’s proposed rescue bond purchases. Europe’s sovereign problem remains in the background to Japan troubles, but they are not going away.

As for today we suspect that trading will be subdued, unless we see further official intervention in the JPY.

00:00 EUR EU European Banking authority to publish stress test scenarios and details of lenders involved
09:00 EUR Current Account Prior -13.3 bio Exp -8.8
10:00 EUR Trade balance Prior -2.3 Exp -3.9
10:30 EUR Tumpel Guggerel speaking
11:00 CAD CPI Prior 0.3 M/M 2.3 Y/Y Exp 0.4 M/M 2.3 Y/Y
11:00 SEK Oberg speaking

The Risk Today: EurUsd EURUSD finally managed to break higher from its 1.3855 –1.4035 range yesterday, and has since pushed towards 1.4100 levels. Given the bullish engulfing candlestick on the daily chart, the bulls are likely to be the stronger force today, so we are currently watching for a clear break of the next resistance at 1.4085 (8 Nov high). Beyond there, next levels are 1.4281 (4 Nov high) and 1.4415 (19 Jan 2010 high). Expect good support to emerge back towards 1.3980 (today’s lows), 1.3856 (Tuesday’s low), 1.3744 (2 Mar low), 1.3705 (24 Feb low), 1.3635 (minor corrective low on 22 Feb) and 1.3525-28 (22 Feb low and 100-day moving average).

GbpUsd We are still watching the maturation of possible double/triple bottom pattern on the GBPUSD charts, with a base of 1.5977 and a neckline around 1.6200 (Monday’s high). This pattern does still require a break above 1.6200 to become active (and thereby trigger our long entry), but if we are correct, then we can aim for a target around 1.6420 levels. Resistance levels of note are eyed at 1.6243 (9 Mar high), 1.6344 (2 Mar high), and 1.6460 (19 Jan 2010 high); although clearly that latter level is beyond the scope of the double bottom pattern. One encouraging sign for us bulls is that the last two days’ price action looks to have printed a bullish engulfing candlestick pattern on the daily chart which suggests the bulls have taken control in the short-term; so we are optimistic of a development soon. Of course, until the pattern becomes activated, there is still a very real possibility of a deeper move lower, so we must be disciplined not to buy in too early. Below 1.5977 there is a nearby support at 1.5964 (11 Feb low), but then a long gap until next pockets of demand at 1.5823 (31 Jan low) and 1.5752 (25 Jan low).

UsdJpy What a rollercoaster week for USDJPY; after Thursday’s Asian session plunge to new all-time lows of 76.40, this morning saw a quick round of coordinated G7 intervention which took us screaming higher to 81.99. We anticipate that this first round of intervention was an early warning shot, and that further JPY strength will not be tolerated silently. Only weak support is eyed at 78.25 before the all time lows –but expect central bankers to be swift in buying USDJPY if we look to get close to either of those levels. Next resistance levels are now 82.05 (15 Mar high), 82.45 (14 Mar high), 83.30 (11 Mar high), 83.55 (18 & 21 Feb highs), and 84.00 (roughly the 16 Feb high).

UsdChf After hitting new all-time lows of 0.8896 during Thursday’s Asian session, USDCHF has recovered rather strongly, hitting a high of 0.9091 early this morning and remaining above 0.9000 into the European open. Without the spectre of central bank intervention (that is helping support USDJPY), USDCHF is still vulnerable to further downside price action as safe-haven is sought from worried investors. Only supports eyed are 0.8965 (17 Mar low) before the record 0.8896 level. Resistance levels are stacked up at 0.9091 (today’s high), 0.9141 (former support turned resistance), 0.9198 (16 Mar high), and 0.9252 (15 Mar high).

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