ABI (Anything But Intervention)
By Jonathan Clark - 21 feb 2013
In an environment of slow global growth, countries view exchange rates as a critical policy tool. Thus the term ‘currency wars’ as countries are attempting to gain an export advantage by weakening their currency but, if everyone does this, then there can be no winners. The rules governing what is ceptable become clearer and clearer to governments and central banks as time passes. In 1999, when then Bank of Japan Governor Sakakibara (nicknamed “Mr. Yen”) intervened in the market to sell ¥3 trillion to weaken the Japanese currency, he evoked the ire of then-Treasury Secretary Summers by manipulating the yen in an obvious manner. As we have seen since 2009, it is now considered acceptable for emerging central banks to manipulate their currencies in order to stem capital inflows through direct market intervention or other measures, but not for the major countries. There are exceptions to these rules, as Japan was allowed to intervene without criticism soon after the Tōhoku earthquake and tsunami in March of 2011, when the yen strengthened aggressively. It intervened several more times to fight yen strength but, over time, the impact of the moves diminished. It wasn’t until the middle of November of last year when Shinzō Abe ran as the LDP candidate for prime
minister, promoting policies to grow the economy (and undermine the currency), that the yen made a steep decline. The moral of this story is that major countries who intervene will be slapped down but if they are willing to implement policies that are known to weaken a currency indirectly, this will be tolerated. The Japanese have learned this lesson well and will continue to have success weakening the yen. Dollar/yen has stalled in its uptrend during the past several weeks as we expected. Part of the reason for the recent weakness is that the currency pair was overbought according to technical measures and is working off this condition.
By early next week we expect dollar/yen to bottom. Any final weakness seen should be contained by 90.75 and, if seen, this should be a good place to buy. A close below this level means it could spike lower to 89.35 before bottoming, but this is less likely – still we wold buy. The most likely day for a low is Monday and the dollar should turn higher and rally into the week of March 11 for an initial peak. This strength could last into the end of March or early April. Our target for this upmove is the 95.25 area by April 1 and could possibly trade to as high as 97.00. There are further highs due in July as well as around the end of the year. Our further objective for the uptrend is the 105.00 area.
