HONG KONG (MarketWatch) — The Japanese government intervened in the foreign-exchange markets Thursday to curb the yen’s strength, prompting a sharp pullback in the local unit against all major currencies.Looking at the chart, the pullback appears to be about as sharp as a butter knife. For a single day it's a fairly sizable move but the cross still has a ways to go to just get back to where it was at the beginning of July.
The intervention was confirmed by authorities, with the Bank of Japan saying the Ministry of Finance’s action “will contribute to stable price formation in the market.”
The JCB isn't the only central bank to recently attempt to guide the markets. The Swiss Central Bank intervened a few hours earlier but got only a 1.3% boost for their efforts. Just this past Tuesday, we posted about how the strengthening Franc was creating problems for Swiss exports and that was being reflected in their stock market. Here's an excerpt:
One group of people that is not particularly happy with this trend are the members of the Swiss National Bank, although they appeared to have learned from back in 2009/2010 that resistance (i.e. intervention) is futile.Ooops, we goofed. It appears that the SNB has in fact NOT learned its lesson and it will be interesting to see how much money SNB head Hildebrand will lose this time around. Lets see if they can top the Sfr21 billion from 2010.
On the other side of the spectrum, we have Turkey who is trying to prevent their currency from weakening further. With overnight lending rates sitting at 1.5%, raising interest rates would appear to be the obvious option. However according to this article from the Hurriyet Daily News, the central bank is exploring other avenues.
In order to prevent the Turkish Lira from sliding further, several experts are voicing their opinion of what type of precautionary measures Turkey’s Central Bank may choose to execute.I believe I have the reason for why the Turkish Central Bank is interested in pursuing other courses of action besides raising rates. It's this:
Özgür Altuğ, chief economist at BGC Partners, wrote in a short note to investors that the Bank could switch to a different monetary policy scenario and introduce a series of measures.
The Central Bank might, among others, decide on a hike in its overnight borrowing rate, which was reduced sharply from above 6 percent to 1.5 percent in the fourth quarter of 2010, in order to attract short-term foreign capital inflows to limit the depreciation of the lira, Altuğ said. Other measures could be a cut in foreign exchange required reserve ratio to support the foreign exchange liquidity of the system and banks’ lending capacity and the introduction of daily foreign exchange selling auctions, he added.
The blue line is the USDTRY (US $ / Turkish Lira cross), the red line is one of the main Turkish equity indexes and the y axis is in terms of % change. That chart has to represent a central banker's worst nightmare: a currency that is weakening at the same time that equity markets are declining. It's a financial Sophie's Choice; protect the currency at the risk of crashing the stock market or allow the currency to continue to weaken in an attempt to provide support to equity investors? This one's going to be interesting to watch.
