Here's What Else The G7 Can Do For The Yen

One of the casualties of the Japan earthquake and tsunami was Yen, Japan’s currency. Rather than tanking because of the extra liquidity Bank of Japan provided for the market, Yen surged against all other currencies instead.

In this case, traders followed the same playbook for the 1995 Kobe quake, betting that Japanese companies and individuals need to repatriate capital back to Japan for the rebuilding effort.

While this thesis is debatable, traders were not concerned about the argument of its validity, and Yen rose significantly in the days following the quake, as USD/JPY traded down to 76.4, nearly an 8% strengthening in 5 business days.

As an export oriented country, Yen’s rapid ascent unnerved Bank of Japan. As Honda Motor estimated, each rise in one yen against the US dollar will cause 17 billion yen in lost earnings for the company. On Mar 17, G7 pledged to intervene to stop the rise of yen, and USD/JPY quickly reversed its course to trade back to 81.26. It then traded as high as 82.00 the following day. This illustrated that most of Yen’s move was more speculations by traders than true repatriation of capital.

While USD/JPY is now hovering between 80.5 and 81, judging from the inability of Yen to push past 82.00, we don’t think speculators have gone away on their playbook trade. In order to get the job done, and alleviate the need to intervene again, G7 will need to do better than this. Currently the Yen strengthening trend is still intact, and for G7 to really scare off the speculators, they need to cause technical damage to the trend. In this case, only a push of USD/JPY to 83.4, the previous rate where it was trading before the quake happened, will cause traders to doubt themselves. To really get traders to ponder changing course, though, will be to push USD/JPY pass 84.5.

In general, people do not have much faith in international coalitions, when different countries having their own policies and concerns towards a coalition’s action. This is illustrated in the enforcement no-fly-zone enforcement by the United Nations security council, when now the Arab League is wavering its support, and the US trying hard to hand off its duties, not to mention the absence of the BRIC countries in any form of support. Therefore, if G7 does not heighten its resolve to deal with Yen’s strengthening problem, it may soon find itself trapped in a situation getting harder and harder to deal with.

Daniel Ho is the founder of 10xreturn.com, a financial portal providing financial information and market statistics for investment professionals.

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