Currency market intervention
The UK economic news has been thin on the ground this week with nothing released yesterday and no UK releases today either. As you can see from the economic calendar it is quiet across the board with only three European data announcements to speak of today. From this you would expect the global currency markets to relatively subdued, but you would be wrong!
The hastily assembled G7 teleconference that took place last night announced that each of the respective members’ central banks would begin a coordinated action to intervene in the currency markets – the first time since 2000. Why? Well, there are concerns that the crippled Japanese economy and the Middle East upheaval could combine to derail the global recovery. The action is particularly focussed on trying to weaken the Japanese Yen, which has reached post Second World War highs against the US dollar in the last 24 hours.
Now it is slightly baffling why the Japanese Yen would strengthen at a time when the country is trying to manage the after effects of a huge earthquake, devastating tsunami and nuclear crisis – hardly the time would you expect investors to want to buy Yen. The reason cited for its support is that Japan, who has one of the world’s largest foreign currency reserves, will sell some of this stockpile to buy yen to pay for reconstruction – increasing the demand for Yen and causing the currency to strengthen.
The problem this creates for Japan is that with a strong Yen it makes their imports cheaper and their exports more expensive. This scenario for a country who is one of the world largest exporters is unwelcome at a time when they need to sell more to support the economy during this crisis. With this in mind and with fears that a weak Japanese economy could bring the global recovery to a halt the G7 has decided to act.
In morning trading these actions began to make headway with Japanese Yen weakening by 3% against the dollar and 2.5% against the pound. From a sterling perspective, the pound continues its downward trend against the euro at 1.1435, with German producer prices released today showing a 0.7% increase – this reinforced market expectations that the ECB will increase rates next month to control inflation. The pound was also weaker against the dollar at 1.6071 having reached 1.6140 yesterday on rumours that a large Canadian bank had been responsible for the short term rise.