In a rare spirit of co-operation the G7 pledged to intervene jointly in the currency markets for the first time for over 11 years, taking the markets by surprise and driving the US dollar back above the 80 level against the yen (USD/JPY).
The intervention began with the Bank of Japan buying US dollars in Asia trading.
The statement went on to say that each Central Bank will sell yen as their respective markets open, and in the short term it has to be said that any action will have a better chance of success if the Bank of Japan isn’t left to act alone.
If the BOJ was left to act alone then it could suffer a similar experience to the Swiss National Bank, who lost 14bn Swiss francs selling its own currency in a similar effort last year.
It remains to be seen whether the Fed also steps in to buy the dollar given that the current economic policy of the US is designed to weaken it by way of QE.
In the longer term it is difficult to imagine a scenario that would help the Bank of Japan weaken the yen on a more permanent basis, short of an end to the current US policy of dollar devaluation, and some form of US fiscal tightening.
Given that Bernanke’s most recent public comments with respect to monetary policy have continued to be fairly dovish, that doesn’t seem likely, which leaves the printing presses as the other option for the Bank of Japan as they look to outfed the Fed.
With the US dollar index falling to its lowest levels since last November and below the trend line support at 76.30 from the 2008 lows at 70.70, it seems likely that the US dollar will continue to remain under pressure, despite the intervention in the medium term.
The single currency has continued to garner support after a 10 year Spanish bond auction yesterday saw yields fall slightly to 5.162% from February’s 5.20%.
The pound has rebounded from its lowest levels of the day after the Bank of England UK inflation expectations report for the next 12 months jumped from November’s 3.9% to 4% and the highest level since August 2008.
This would seem to suggest that the British public are starting to view inflation prospects as becoming more embedded and as such will increase the pressure on the committee to consider raising interest rates in the next few months.
UK Gfk consumer confidence data for February came in at 38 well below last months figure of 47, highlighting growing consumer concerns about the onset of future austerity measures ahead of next week’s UK budget.
EURUSD– the single currency continues to find support above the key 1.3850/60 support area and made a marginal new high at 1.4052 yesterday. Having made this new high the euro is finding support around the 1.3970/80 area and only a move below here would signal a re-test of support. The next move would appear to be higher while above this support towards the November highs of 1.4280. There is also major trend line resistance above 1.4280 which comes in around 1.4315, which can be drawn from the all time highs at 1.6040 in 2008. Only below 1.3850/60 re-targets the 1.3750 area and then the 100 day MA around 1.3530.
GBPUSD– the pound confounded expectations of a break below the key support between 1.5965 which is 38.2% retracement of the 1.5350/1.6345 up move, and 1.5980, the 55 day MA. And so the recent range continues with a daily close below 1.6000 required to signal a break of the February lows at 1.5965 which would then be the first indication of the start of a correction lower after the gains of recent weeks towards 1.5850 which is 50% retracement of the same up move, followed by 1.5730. On the other side of the range is resistance near the range highs around 1.6280, with the big resistance around the 1.6350 area. Above 1.6350 re-targets the 1.6460 area and 2010 highs.
EURGBP– the single currency has all week continued to find enough selling interest above the 0.8710 level to prevent an overspill towards the 0.8780 area. If it continues to find this level difficult to crack we should see a test of support around the 0.8660/70 area which has been the lows of the past two days. A break below here would then target the 0.8605/15 area, which also doubles as support from the February lows at 0.8355.
USDJPY– last nights intervention sent the dollar back through the 79.80 level after the new all time lows at 76.30 seen late on Wednesday night. For the US dollar to stabilise we need to hold above the 79.80 level and close above 80.20 this week which could provoke a deeper correction back towards 82.20. In the event the US dollar is unable to retake these levels by the end of the week we could see further losses towards this weeks low initially on the way to the 75.00 area.