The rumour everyone is talking about today is a coordinated move on the part of various central banks, organised by the Bank of Japan, to sell yen.
In a note, Morgan Stanley says the odds of a massive intervention are rising to a critical level.
In our prior research, we have identified an ‘intervention
checklist’ of key criteria that we believe have the largest
influence on the decision of policymakers to intervene in
currency markets. The most important of these criteria
(1) market mispricing of relative growth outlooks
(2) significant deviation of the real exchange rate from
(3) excessive market positioning
(4) increased momentum in exchange rate moves.
Using this broad framework we have developed a suite of
models to gauge the probability of currency market
intervention. According to our framework, model results
indicating probabilities below 20% are consistent with a low
level of intervention risk, results in the range of 20-30% are
consistent with an elevated risk of potential FX intervention,
while results above 30% suggest a significantly high risk of FX
Currently, our models reflect a 28% chance of coordinated G3
currency intervention (Exhibit 1). This result is consistent with
an elevated threat of currency intervention, but it does not
necessarily imply that action is imminent. Indeed, as Exhibit 1
shows, the threat of coordinated action in USD crosses has
registered as high as 50% earlier this year, amid
unprecedented market dislocations during Q1 2009. Since
then, the threat of coordinated intervention has been declining.
The falling probability largely reflects the decline in currency
market volatility. Indeed, though the USD’s fall has been
ongoing, the path has remained orderly for the most part.
This has been particularly true on the EUR/USD axis; and this
has been a key factor dampening coordinated intervention risk,
according to our models.
However, while the probability of coordinated USD
intervention has been on the decline, our models show the
probability of intervention in the USD/JPY exchange rate is
Our models indicate a 29% risk for
intervention in USD/JPY, which is just on the cusp of ‘high risk
territory’ (Exhibit 2). The 2 factors contributing the most to the
elevated risk for USD/JPY intervention are (1) the apparent
mispricing of longer-term relative growth outlooks, a factor we
proxy using productivity and real rate differentials (Exhibit 3),
and (2) the deviation of the real effective JPY exchange rate
from its longer-term average (Exhibit 4).
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