G7 yen intervention sends NZ$ up

Group of Seven Nations to intervene in currency markets to stem rising yen, NZ$ strengthens

18th Mar 11, 3:13pm by Alex Tarrant

The New Zealand dollar rose about 2.5% against the Japanese yen after the Group of Seven nations announced they would intervene in the currency markets to drive the yen lower as Japan looks to deal with the effects of the devastating earthquake and Tsunami that hit the north east of the country last Friday.

Reuters reports:

Japanese authorities will buy dollar/yen in the market from 9 a.m. (12:00 a.m. GMT). Other central banks will act when their markets open, Noda said. He declined to comment on the size of Tokyo's intervention.

"When Japan is in such a state, it's extremely meaningful for G7 countries to cooperate and take coordinated action to stabilize financial markets," he said.

The rising yen has presented an extra challenge for the Japanese recovery, Karen Maley at Business Spectator wrote before the G7's decision:

This morning’s meeting comes after a tumultuous day of trading in foreign currency markets yesterday, which saw the yen surge by more than 4 per cent in less than an hour, to a record high of 76.25 yen to the US dollar.

The rise in the yen poses additional challenges to an economy that is already grappling with deflation, and which faces a contractionary shock after last Friday’s devastating earthquake and tsunami, which has disrupted electricity supplies across the country and caused many Japanese companies to temporarily halt production.

The latest rise in the currency dents the competitiveness of big Japanese corporates, which are heavily dependent on international exports, and for the Japanese sharemarket.

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21 Comments

by Kate | 18th Mar 11, 5:35pm 1300422942

Lemmie see if I can get this right.

Japanese govt initially prints to save the Nikkei (not the people). People respond by calling in their overseas currencies holding (repatriation). The yen strengthens and all other currencies drop.

All other currencies announce they will intervene and, on the news, all other currencies rise against the yen.

So, all stockmarkets now saved - all currencies now where the powers-that-be reckon they should be.

Green shoots everywhere!!!!!!

http://finviz.com/futures.ashx

A fairytale with a happy ending (today anyway!).

Can't wait for tomorrow.

by michael | 19th Mar 11, 8:27am 1300476464

Kate: The Yen is to big to fail.

by Wolly | 19th Mar 11, 8:57am 1300478257

Kate's right...for today...tomorrow is another problem..."must go now" the polly said..."have to draft tomorrow's news reports you know"

by Boatman | 19th Mar 11, 12:53pm 1300492408

Kate...you are so right... wait for tommorow Economics can be a bit like an unpredictable dog ... when you turn around it bites you on the arse. The markets will respond to this move by Central Banks, becasue they will seek profit from it. The problem is that what they have done will lead to distortions elsewhere, kind of like unintended consequences.

Its too early to tell precisley where or when or even what these unintended consquences will be, but consequnces there will be.

One needs to remember that like in physics, for every action , there is an equal and opposite reaction, so economics follows the same principles. In reality , we can only "model" possible outcomes , when they do come , they are often from the left field, and they are not equal reactions, they are often magnified.

I am personally very skeptical and quite pessimistic right now. I will be hunkering down and saving , and will not be making any spending or investment decisions at all for the forseeable future.

by Christov | 18th Mar 11, 5:47pm 1300423648

In that case the headline should reflect it's rise against the Yen only....as the G7 are proposing selling yen to buy USD EURO and so NZD should track downward against that pair.

by scarfie | 18th Mar 11, 8:29pm 1300433353

Didn't work last time they tried. What I understand is that there isn't enough capacity to counteract unwinding of the carry trade.

http://twitpic.com/4aj2lt

by Boatman | 19th Mar 11, 1:15pm 1300493729

Correct Scarfie , Read this simplified summary of how the carry trade scam works .

The carry trade is literally massive and actually has two distinct components , Japanese savings that are invested offshore and secondly and more importantly ..... money borrowed at 0,15% in Japan and invested at say 4% elsewhere . No one is sure precisley how big the carry trade actually is.

The borrowed money is itself geared by borrowers at ratios that are around 90% , and worse than that , these supposedly good loans are then "packaged" by the Banks into securitised products.

These loans are then taken off the Banks balance sheets into SPV's where the bank does not have to account for it in maintaining their credit reserve ratios ( the 'freed up" capital can thus be now relent to others ) Thus money is simply created out of nothing but a piece of paper.

Then you discover that the collateral for the original loan made to the carry trade speculator was as property in Sendai .... which no longer exists

by Andrewj | 18th Mar 11, 8:46pm 1300434405

Got this off the telegraph, a commenter I keep an eye out for

drjonathanwilson 6 hours ago Recommended by

5 people Whilst general trends are correctly identified by many on these blogs, for example the long term economic and social risks of a currency union across economic regions with significantly divergent rates of productivity, I think that it can be a useful exercise to attempt to join up the dots in a world of interlinked but unintended consequences or random events in order to get an early warning on the next major event.

If we join up the dots by starting with the dot that is likely to have the biggest effect on all the others, I would suggest that that dot would be the size of net US debt and the continuing size of the US deficit. A US default on its debt would be the equivalent of an earthquake, tsunami, and nuclear meltdown all rolled into one with regard to its effect on the world’s financial systems.

Banks, large and small across the globe would have their balance sheets vapourized overnight as the value of their dollar assets are downgraded. Interbank transfers would instantly freeze, credit would be non existent and global trade would be something in the rear view mirror.

But what would trigger a US default? As in all bankruptcies (because that is what a default is) the underlying cause is transaction insolvency (or if you prefer, a business model that no longer works). The signs of overall economic transaction insolvency are a combination of persistent rising debt (the US has that in spades) and rising unemployment particularly among the young (again the US is a star in this category).

In other words wealth is being consumed in the economy at a greater rate than it is being replaced. This is typical of economies where the capacity of voluntary transactions (private sector) to replace the loss of wealth through government induced coercive transactions (made possible only through taxation) has been exceeded.

Therefore a US default is increasingly likely if random or unintended events cause the US deficit to grow. Hence the importance of the other global dots derives their importance in relation to how they affect long term US solvency.

So how do the other dots around the world positively or negatively affect US solvency today?

Let us consider Japanese, Middle East, Euro and BRICS dots and their effect on US solvency.

The catastrophes in Japan – result negative effect due to repatriation of US denominated assets reducing liquidity for US treasuries and hence raising yields first in the US and thereafter worldwide. Increased interest rates on US debt increases the US deficit through increased interest expenses.

Middle East – no brainer – oil price rise results in falling US consumer demand equals reduced US solvency equals increased US debt as total tax revenues fall. Secondary effect – increased cost of US borrowing as sovereign risk rises.

Euro area – Increased interest rates plus increased energy costs equals falling demand and hence rising insolvency first within PIIGS and later to the core. Failing Euro equates to greater Fed exposure through central bank support in liquidity to the EMU banking system. This is turn equals increased likelihood of US insolvency. Secondary effects include declining US exports to the Euro area as consumer demand falls generally in the EMU region – increasing US insolvency.

BRICS – China in particular – rising inflation results in rising interest rates which further drains liquidity from the US Treasury market. Secondary effects include falling Chinese trade surplus as US demand falls and when coupled to falling Chinese domestic demand due to interest rate increases (and hence falling property values), Chinese GDP contracts more than anyone has predicted. Chinese repatriate foreign holdings in the form of food commodities. Overall effect is to advance US insolvency by raising US yields.

The sum of these interacting variables are rising US yields in a thinning market against a backdrop of increasing doubts about long term US solvency. As these doubts grow two trends emerge (a) major countries central banks begin to take actions to insulate their national financial systems from US contagion (Glass Steagall type legislation enjoys a renaissance), and (b) the pressure for a “world currency” increases from the lunatic fringe in an attempt to bury the underlying global insolvency problem.

We have always lived in dangerous times but Fort Moraymint looks increasingly like a good destination before they raise the drawbridge.

Jonathan Report Recommend Reply

by Gibber | 18th Mar 11, 9:53pm 1300438390

Andrewj,

if you ever start your own blog, I'd subscribe. Just to see what you had unearthed.

I don't have the time to trawl the web for these gems. I do enjoy the alternative points of view you unearth.

Cheers & Thanks

by Andrewj | 19th Mar 11, 9:48am 1300481305

Gibber, thanks I spend way too much time on the computer.

Im in a dilemma, I sold all my farms except one which is 250 acres. Took all my money to Aussie when it was .88 to the NZ$. Now I don’t know what to do next.

I accept the economy will crash as a given, its why I don’t bother with the housing threads, its just a timing issue you cannot bullshit an economy for ever.

The average Joe works hard to earn a dollar while our leaders treat the same dollar with nothing but contempt, wasting it and destroying its value with impunity up to now. They think that QE is a great idea giving dollars that most of us struggle to save, to bankers and the elites to speculate with, pushing the costs of living up and they charge the elites almost nothing for the privilege.

The Governments hides the truth from us all as much as possible, as Colin Riden pointed out using ‘net debt’ is misleading when you have unrealistic values on assets like NZ rail(10 billion) student loans (17 Billion) and then underestimate the costs of leaky homes and even just maintenance on existing infrastructure.

So now we need to borrow an extra 10 billion for the ChCh earthquake is that because the assets on the EQC books are over valued and if sold would expose the true state of affairs? Bernard said be careful the Lawyers are keeping an eye on comments about AMI, when I would have thought it was AMI that needed to keep an eye out for Lawyers.

Anyway back to me, what the hell do I do now? My skills are in farming and there is no way I’m going farming at these prices especially with these costs. Yesterday I got an email from WPGG selling a ‘top farm’ it wasn’t till I was half way down the page thinking wow this is an amazing place that I realised it was an old neighbours farm that I used to work on in the school holidays, it was advertised in a way that even fooled me, the bullshit was pilled on, its an average farm. Clay soils gets very wet and very dry has a problem with grass staggers and can have an eczema problem, the house water is rain water and the farm water is dicky as hell I know I’ve worked on it. Its an average grazing block but nothing special.

The banks are still screwing farmers, heard of two farmers forced to sell, left with the Gst bill. It appears that if the bank sells you up, then they get to pay the Gst but if you agree to sell even if its distressed you get to pay it. Its very upsetting if you think you have a little nest egg only to have it snatched by Ird. One of the farms was taken over buy the bank or rather sold to the bank and now they have their own manager on it. We are in the process of corporatizing rural NZ without debate. Land values are not falling like they should be and costs are still out of control.

My issue is safe guarding my wealth from these idiots and I don’t trust gold and I can see a lot of new taxes coming my way.

by speckles | 20th Mar 11, 9:33pm 1300610032

AndrewJ always appreciate your comments, good to see you diversified out of NZ assets at the right time. You really need to diversify a good part of your assets away now from the Australian dollar. You good at research...it the only way to determine what is right for you.

by Andrewj | 19th Mar 11, 10:05am 1300482326

Johgn Mauldins take on Japan's energy problems

It is not yet clear how devastating the nuclear-reactor damage will prove to be, but the situation appears to be worsening. What is clear is that the potential crisis in the Persian Gulf, the loss of nuclear reactors and the rising radiation levels will undermine the confidence of the Japanese. Beyond the human toll, these reactors were Japan’s hedge against an unpredictable world. They gave it control of a substantial amount of its energy production. Even if the Japanese still had to import coal and oil, there at least a part of their energy structure was largely under their own control and secure. Japan’s nuclear power sector seemed invulnerable, which no other part of its energy infrastructure was. For Japan, a country that went to war with the United States over energy in 1941 and was devastated as a result, this was no small thing. Japan had a safety net.

The safety net was psychological as much as anything. The destruction of a series of nuclear reactors not only creates energy shortages and fear of radiation; it also drives home the profound and very real vulnerability underlying all of Japan’s success. Japan does not control the source of its oil, it does not control the sea lanes over which coal and other minerals travel, and it cannot be certain that its nuclear reactors will not suddenly be destroyed. To the extent that economics and politics are psychological, this is a huge blow. Japan lives in constant danger, both from nature and from geopolitics. What the earthquake drove home was just how profound and how dangerous Japan’s world is. It is difficult to imagine another industrial economy as inherently insecure as Japan’s. The earthquake will impose many economic constraints on Japan that will significantly complicate its emergence from its post-boom economy, but one important question is the impact on the political system. Since World War II, Japan has coped with its vulnerability by avoiding international entanglements and relying on its relationship with the United States. It sometimes wondered whether the United States, with its sometimes-unpredictable military operations, was more of a danger than a guarantor, but its policy remained intact.

It is not the loss of the reactors that will shake Japan the most but the loss of the certainty that the reactors were their path to some degree of safety, along with the added burden on the economy. The question is how the political system will respond. In dealing with the Persian Gulf, will Japan continue to follow the American lead or will it decide to take a greater degree of control and follow its own path? The likelihood is that a shaken self-confidence will make Japan more cautious and even more vulnerable. But it is interesting to look at Japanese history and realize that sometimes, and not always predictably, Japan takes insecurity as a goad to self-assertion.

This was no ordinary earthquake in magnitude or in the potential impact on Japan’s view of the world. The earthquake shook a lot of pieces loose, not the least of which were in the Japanese psyche. Japan has tried to convince itself that it had provided a measure of security with nuclear plants and an alliance with the United States. Given the earthquake and situation in the Persian Gulf, recalculation is in order. But Japan is a country that has avoided recalculation for a long time. The question now is whether the extraordinary vulnerability exposed by the quake will be powerful enough to shake Japan into recalculating its long-standing political system.

by Kunst | 19th Mar 11, 10:48am 1300484899

Blindness of societies with severe consequences.

Andrew you have forgotten one, but the most important component – us the public.

That is where the big decisions are made and it is wrong - read links please

“The worldwide Natural Tee Clubs” – one example only .

http://www.thevcroundtable.com/index.html

http://www.thevcroundtable.com/meetings.html

In their own words: The VC Roundtable is a private, invitation-only, organization whose membership includes the general partners of the venture capital funds, corporate strategic VCs, and the leadership of angel organizations from all over Southern California. The purpose of The VC Roundtable is to provide a private forum for the regular interaction between the members.

Reading through the link above - it turns out such organisations all over the world are almost secret societies, who don’t interact with the public in decision making and/ or are willing to apply democratic political rules/ principles.

It doesn’t surprise me the existence of so many NPP's are the results of that. The same games are played in the banking and oil industry.

by Andrewj | 19th Mar 11, 6:32pm 1300512729

Nigel Farage: Van Rompuy must apologise over Gaddafi meeting http://www.youtube.com/watch?v=058BBJ-HgLc

by iconoclast | 20th Mar 11, 3:43pm 1300588992

Follow the Money

Not an expert in the field of Foreign Exchange markets. What we do know is trillions of hot money slosh around the world every night. The "carry trade" is part of that money-go-round. Seeking to borrow (sell short) low-cost money in a stable currency and transfer it (buy-long) to a high-cost stable currency. An important element is the stability of the currencies being traded. For more than a decade Japan has had a near zero interest rate policy while Australia and New Zealand have been two of the most stable high interest rate currencies. Hence both the AUD and NZD are two of the top 10 most traded currencies in the world. The emphasis being stability. The JPYUSD and USDJPY are fairly volatile compared to the AUD and NZD pairings. As Boatman correctly points out "the carry trade is massive". The bet is to "sell" the JPY which isnt going to rise while zero interest rates are in force and "buy" the high-rate currencies which aren't going to fall while high interest-rates are in force. The low risk is if either (a) Japan raises interest rates or the high rate countries lower interest rates, or (b) an event happens that raises the value of the JPY against the other two currencies. which would cause massive losses. And that's what happened on Monday 14 March. For whatever reason, the price of the JPY spiked up triggering huge margin calls and forcing an unwind of carry trades which in turn exacerbated the narrowing of the spread between the JPY and the other two currencies. Have a look at charts of JPYUSD, JPYAUD, JPYNZD. The rise in the JPY pairings against the AUD and NZD was more than twice the rise in the JPYUSD or JPYEUR pairings. Someone got badly hurt. Stops were triggered. Margins were called.

Which is the most stable low cost curency in the world - JPY - Japan

Which are the two most stable, high cost, currencies in the world - AUD NZD

Who is the biggest global player in the world?

On Friday 11 March an earthquake followed by a tsunami struck Japan. By Monday 14 March one of the Fukushima nuclear reactors began to fail. The magnitude of the destruction was yet unknown. Yet on Wednesday the G7 stepped in and "sold" the JPY Yen currency down. Why. Who was the loser? The repatriation of Japanese money from the US is not the reason. It wont be needed yet until the extent of the damage is known, and the change in the JPYUSD was the least of the lot, contradicting the stated explanation of repatriation. It is reasonable to conclude it was hot money being hammered. What is remarkable is the speed with which the G7 stepped in. Who were they saving? Who were they bailing out? Was it a Bird? Was it a Plane? or was it a SQUID?

by speckles | 20th Mar 11, 9:23pm 1300609438

Good connecting the dots..hint - you have half of it sorted :-) Can't comment because of client confidentiality... sorry.

by iconoclast | 20th Mar 11, 9:59pm 1300611570

OK Speckles, If I ask the questions can you answer YES or NO

So, the suggestion, by the beehive leader 2 weeks ahead of the RBNZ official move an alert?

by iconoclast | 20th Mar 11, 10:04pm 1300611846

I had guessed from the nature of some of comments from several commentators over the past couple of months that there is more known by these same commentators than they are willing to disclose .. the cone of silence preserved huh?

by scarfie | 21st Mar 11, 9:10am 1300651812

Let me take a guess.

Large amounts of people had leveraged short positions and the sudden climb in the Yen hurt badly.

Said people have mates in places and advise mates to sort it.

Mates arrange arrange with other mates within central banks a plan to crash the Yen at an arranged time.

People with losses, in expectation of intervention, take large short positions before arranged time. Yen drops dramatically, people recover losses and are now in a position to take long positions in the Yen in expectation of eventual unwind of carry trade.

by Tut Tut | 29th Mar 11, 1:17am 1301314639

Ummm I am expected to suppose http://www.youtube.com/watch?v=QoUWgI-c9g4 is responsible and we as tax payers and niave consumers will be perpetual suckers!

by iconoclast | 20th Mar 11, 7:46pm 1300603576

Confirmed. Stephen Roberts, Chief Economist of Nomura Australia states there was no evidence of any repatriation of Japanese investments in US Treasuries back to Japan.