Ralph Shell @ 11:55 AM, Friday September 17 2010
After weeks of complaining about damage being inflicted to the Japanese economy by an over valued yen, the Bank of Japan with directions from the Ministry of Finance intervened. While only the BOJ has a tally of the total activity, trade rumors are sales of over $20B yen to purchase the USD. It is reported the BOJ will not drain the liquidity, hoping that banks will use the surplus funds to make business loans.
There is no assurance there is sufficient demand by business to borrow this amount of money, and the new bank liquidity, like the BOJ funds, may will then be invested in US Treasury and Agency paper. This means banks, who have yen, will need to buy USD and sell yen, thereby adding further pressure on the yen. With 10 year US Treasuries yielding 2.73% versus 1.08% in Japan, this may not be such a bad trade.
The Japanese, with $1,070T in currency reserves, are not likely to be bluffed from this poker table. Besides, if you strongly feel that something is too high, much too high, why not be an aggressive seller? Remember the run up in the value of the yen was caused by an association of the chicken little crowd, and the tag along, trend following, lemmings. They felt that the yen, precious metals and possibly the Swiss Franc are the only safe sanctuaries, from the world's financial troubles.
Another casualty from intervention in the yen was the large specs in the futures markets. This group, usually currency or hedge funds are trend followers, and were long over 52,000 contracts in the last COT report. With the open interest down over 20,000 contracts, in addition to the Sept contract expiration, many of these longs are now gone.
Forex analysis is a big puzzle, and here is another example. Why, if the Japanese buying is concentrated in the USD, did the euro and the pound gain on the dollar. Were there a significant number of long yen short euro and pound crosses that bit the bullet? What about the other big guy at the currency reserve table, China? If the yen is headed down where does China now put their reserves?
Prior to this week the specs were short the euro and pound futures by 26,355, and 17,136, not big numbers, and certainly not big enough to cause a panic short squeeze. Perhaps the euro reached some short term objectives as it climbed above the 1.31 handle, but what about the pound?
It was reported this morning by the CME that the open interest in the pound was only 73,621 contracts. This suggests that no one knows what to do with the pound. Contrast this to to A$ where the OI is now 125,969 contracts and the bulls are having a big rowdy party.
In Britain, recent economic numbers are not encouraging, and the US Keynesian cabal, thinks Britain's increase in taxes and a reduction is spending in the public sector is akin to an economic death march. The market is creeping higher, and the MACD is giving us a buy signal. Who is going to win this one, the technicians or the fundy guys watching the numbers? Friday is not my day for new trades so it will be a day of rest and observation, but we may be setting this market up for a trade.
My preference is a rally up to the 1.5850 level where selling the GBP/USD looks interesting on a scale up to the 1.60 level.
Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.