I wrote a few days ago that I thought we were seeing evidence of growing instability in the FX markets. The problem is with the “Strongs”. The Yen and the CHF are both at near records against the dollar and they are at records versus the Euro. These records are a cash machine for the FX crowd. The CBs know it and they do not like it.
IMHO the only thing that is going to stop the cycle of the Strongs getting stronger is coordinated intervention where the NY Fed took an active and visible role. We are not going to get that. I think that is an important conclusion. If that is not the case then door is open for continued (irregular) strength of the strong pair. Consider this from Bloomberg:
Japan views probable U.S. opposition to intervention in the foreign-exchange market to address the appreciating yen as an obstacle to taking unilateral action, according to three Japanese government officials.
OK. Read through the lines on this. Not one but three MITI officials have confirmed to Bloomberg that the US Treasury has said, “NIX” to the BOJ Request for some assistance. Why would these three do such a thing? They are pissed at the rebuke.
Yen sales without U.S. backing would be a challenge, the officials said on condition of anonymity because the government discussions are private.
The word “challenge” means: “This is not going to happen”. I love when these guys talk like this. They acknowledge when they are yapping that this is supposed to be sub rosa. When you break a confidence like this you lose a friend. Tim Geithner knows who talked and he won’t forget.
“This time, Japan isn’t the only nation having trouble, and the U.S. and Europe also have a fire under their feet,” said Takahiro Mitani, president of the Government Pension Investment Fund in Tokyo, and a former executive director at the Bank of Japan, said in an interview. “In that environment, it’s not easy for Japan to gain support” for intervention.
He is talking about Switzerland and the CHF. This time, a guy on the record says, “Not in the cards”.
There are big eco numbers and a holiday. The market is in risk on mode. But that will swing too. When it does the market will lean on the Strongs. We now know that there will be no coordinated intervention that includes the US. Three guys told us that Geithner said, “No”. So there is now one less risk in this trade. Therefore it is going to re-appear.
One more thing from these talkers:
Volatility, rather than the current level, would be a more likely trigger for an end to the policy of refraining from sales of the currency.
It’s like they said, “We have to let it go and accept a stronger currency. We will only react if things get sloppy.”
Watch for the Vol to pick up. The market is playing chicken with the Strongs. This talker has tipped an important hand. The market will not miss it.