DIRECTOR OF CURRENCY RESEARCH, GFT
IN AMERICAN baseball when a pitcher hurls the ball within inches of a batter’s face, the move is known as a “brushback pitch” and is meant to convey fear and respect. As the week started in the currency market, Japanese Finance Minister Yoshihiko Noda practiced his own version of a brushback pitch, warning speculators that he was watching the markets carefully and that “excessive, disorderly foreign exchange moves would have adverse effects on the stability of the economy.”
With dollar-yen hovering near the ¥85.00 figure, Japanese monetary officials are clearly becoming concerned about the unfavourable exchange rate differentials. Most Japanese corporations can withstand the current exchange rate levels, but the fear amongst policymakers is that a decisive break below ¥85.00 would trigger a quick move towards ¥80.00, which would threaten Japanese profit margins.
In addition to facing a tougher trade environment, the Japanese are now also experiencing problems with their current account surplus. The latest figures released on Monday showed a contraction in the current account surplus to ¥1.36 trillion, compared to the forecast of ¥1.44 trillion. The reason for the narrowing surplus was a sharp reduction in its income account due to lower US Treasury yields. Japan now finds itself in the unenviable position of seeing its exports suffer due to strong yen appreciation while its income flows decline due to falling US yields. But the Bank of Japan is limited in its response. It is highly unlikely that it will initiate intervention on a unilateral basis, and even if it does, intervention in the currency market without a concerted effort from other major central banks is unlikely to succeed.
The Yen’s current strength is solely a function of US economic weakness. This week the pair could see a relief rally if the Fed holds off on any additional quantitative easing. But as the week progresses, attention will once again turn to US economic data and if trade numbers tomorrow and retail sales on Friday both miss their mark then the pressure on dollar-yen to break below the ¥85.00 barrier will begin to build once again.
Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read commentary at www.GFTUK.com/commentary or e-mail borisand firstname.lastname@example.org.