Goldman's FX Recommendation Recap In A Post BOJ-Intervention World
Some required reading for all FX traders, as Goldman's Thomas Stolper breaks down his team's view on where the USDJPY is headed (no surprise there - can't stray from the party line), and summarizes his latest outlook on the EURUSD, which as we noted previously, is now expected to rise as high as 1.50 shortly. The poor dollar remains the most hated currency in the world... just as the chaircreature ordered.
From Goldman Sachs
1. G7 intervention in the JPY: Immediately after last week’s earthquake in Japan we warned about a possible increase in volatility, which in turn could push the JPY to new record levels. We also highlighted that in such a scenario the likelihood of intervention would be high. The events pretty much followed this script. During the most illiquid FX markets last Wednesday night after the NY close and before the Asia open $/JPY dropped to new record lows below 79.75, which then triggered stops and option barriers all the way to sub 77 levels. Strong verbal intervention by the Japanese authorities followed on Thursday and was ultimately backed by coordinated G7 intervention Friday. $/JPY closed about 1.5% below the pre-quake level and 6.5% higher than the new record lows marked on Wednesday night.
2. How much has the G7 contributed to the Intervention? It will be a while until we know how much the other G7 countries committed to the intervention but we can look at the last joint G7 intervention in September 2000. At the time the ECB led the charge to support the EUR. A joint intervention was followed by several additional operations by the ECB alone. In September 2000, ECB FX reserves rose by about EUR 18bn and data from the Fed and the Japanese MOF suggest that the US and Japan contributed with additional purchases of EUR1.5bn each. This template would suggest most of the heavy JPY selling is done by the Japanese authorities. But the primary importance of a coordinated G7 intervention is the signal it sends to the markets. Disruptive JPY strength is not in the interest of anyone. Given how easily policymakers tend to disagree on currency issues the joint G7 message is a strong signal – regardless of the actual amounts spent by other central banks.
3. Yen reserve holdings by other CBs: One frequently asked question is if the other CBs actually have enough JPY to intervene or if they need to borrow from the Japanese first. A quick look at the most recent annual reports suggest the ECB holds about $13bn worth of Yen, the BOE $3.5bn and the Fed about $10.3bn, of which one third is held on deposit. This suggests other central banks most likely had enough reserves to participate with their own funds. Of course this assumes a relatively small contribution similar to the 2000 interventions in the Euro.
4. More choppy range trading in the JPY: In our latest FX Monthly, released last Wednesday, Fiona Lake looks in some detail at the different forces affecting the Yen currently. Bottom line is that there are many cross currents which potentially offset each other. Moreover, the competing forces may materialise at different points in time. The most likely scenario therefore remains choppy range trading. And given the hurdle for additional intervention by the Japanese authorities is likely low, the bottom of the range appears pretty well defined. We will need to wait until there is more certainty about the Japanese situation before we can better assess the medium term outlook for the post-earthquake Yen.
5. More upside in EUR/$: As highlighted in our previous FX Views, the latest TIC data was quite important as all indications suggested the US attracted strong equity inflows in January. But to our surprise the US actually recorded a net equity outflow during that month. US investors bought more foreign stocks than foreign investors bought in the US. Together with rising oil prices and a deteriorating trade balance, this suggests the BBoP deficit is widening and the USD remains under downside pressure. On the other side of the Atlantic we remain encouraged by the steady progress towards a comprehensive solution of the European sovereign issues, likely translating into a further reduced fiscal risk premium in the Euro. Together with the more hawkish stance of the ECB relative to the Fed, this will likely translate into further EUR/$ upside. We were also encouraged by the resilience of EUR/$ during the notable sell-off in risky assets last week – potentially as sign of the strength in the underlying trend – and decided on Friday to go long EUR/$ again for a target of 1.50 and a stop on a close below 1.35.