FYI | Oct 28 2008
By Chris Shaw
As volatility in foreign exchange markets remains at unprecedented levels, governments and policymakers around the world are being forced into taking further strong action. As an example, Standard Chartered notes Japanese finance minister Shoichi Nakagawa has come out against what the Japanese see as excessive volatility in the yen in recent sessions, indicating further courses of action would be taken to counter the activity in forex markets.
This implies some intervention in foreign exchange markets to settle the currency down, though comments from French finance minister Christine Lagarde have indicated the G7 won’t help and any market intervention will be left solely to the Japanese.
In Standard Chartered’s view, such action will come and is necessary as the Bank of Japan really has few other options in terms of dealing with an economic downturn given debt to GDP remains high and interest rates are already near zero.
As the group points out, the currency had been undervalued and this is now reversing, though the speed of the reversal is nothing short of amazing given in the last month the Australian dollar has fallen against the yen by more than 35% and the Canadian and New Zealand dollars by almost 30%.
This makes intervention a necessity, as a stronger yen will hurt exports in particular and is occurring at a time when the Japanese economy is already slowing down. It is worth noting the Japanese are no strangers to forex intervention, spending billions to keep the yen weak and so help its exporters in 2004 when the economy was struggling to emerge from recession.
But it isn’t just the yen where the impact is being felt, as the collapse of higher yielding currencies such as the Australian dollar is also impacting on those economies and again is likely to generate some policy response.
Such is already the case in Australia, as the Reserve Bank of Australia (RBA) is believed to have this week stepped in and begun buying Australian dollars on the open market as the currency fell to near five-year lows against the US dollar.
How successful this will prove remains in doubt, as some currency traders accept that while there is currently a floor under the currency, the RBA won’t be able to hold it and the dollar will continue to make new lows. It has already been the worst performed over the past month of the 16 major currencies traded against the US dollar and the yen.
