Of Repatriation and Concerted G7 Yen Intervention

♠ Posted by Emmanuel in , at 3/18/2011 01:16:00 AM
My goodness, things are happening so fast that my head is spinning. If the UN establishing a no-fly zone above Libyan airspace wasn't enough, we're now headed for a G7 currency no-speculation zone (of sorts) with regard to the Japanese yen. It certainly isn't everyday when the story on the Yahoo! front page is of G7-coordinated currency intervention. I'm comfortable suggesting that in no other circumstance would market intervention make the headlines were it not for post-disaster Japan being the beneficiary nation in question. You see, the currency of that calamity-stricken country recently hit all-time highs against the US dollar in nominal terms in the wake of the earthquake and tsunami. This, of course, on top of the Japanese government stepping back into FX markets last year after a six-year hiatus.

Longtime FX followers will know that yen movements around this time of the year are attributed to repatriation flows as firms wrap up their fiscal year at the end of March. That is, they need to reconvert their foreign exchange holdings back to yen for the purposes of financial reporting as they close the books. However, well-known commentator Kathy Lien cautions there is no evident pattern in USD/JPY during March:
It is commonly believed that March tends to be a positive month for the Japanese Yen because of the fiscal year end in Japan. Tax incentives and the desire to window dress their balance sheets usually encourage repatriation by Japanese corporations...Contrary to popular belief, there has been no seasonal trading pattern in USD/JPY during the month of March over the past 10 years.
I bring this up for a reason: Nowadays, many attribute the super-strong yen to expectations that widespread yen repatriation will soon follow in efforts to rebuild Japan, Inc. after the disaster. In theory, it would lend yen strength alike in the end-of-fiscal-year story. But speaking of which, doesn't the old story of financial reporting considerations fit into expectations of repatriation as well? For, pressures to window-dress financial statements would be even greater given that a calamity that probably affected any number of businesses occurred so close to the end of the reporting season. It is March, you know.

It's certainly up for debate; perhaps a definitive answer will never emerge as they often don't in mysterious "special FX" land. While the speculators have been cowed for now as the G7 cavalry have mounted a coordinated effort to weaken the yen, let's just say this rolling battle is not over yet. Not by a long shot. From the ever-reliable Reuters:
Japanese shares jumped nearly 3 percent and the yen tumbled on Friday after the G7 group of rich nations agreed on joint intervention to curb the Japanese currency's rise, showing its support as the country struggles with a nuclear crisis. The G7 move comes a day after the yen soared to a record 76.25 in chaotic trading, and a week after Japan was struck by a 9.0 magnitude earthquake and devastating tsunami that crippled the Fukushima nuclear power plant.

"This is the first coordinated intervention we have seen since 2000, so it's going to have a very huge resonating effect on the market," said Kathy Lien [hello again, Kathy], director of currency research at GFT in New York.

The dollar spiked nearly 3 percent to a high of 81.49 after the announcement of joint intervention, which came just as Tokyo stock markets opened. The dollar was last trading around 81.15 yen . Traders said the Bank of Japan had been spotted buying dollars.

Market players saw the move as putting a floor under the dollar around 80 yen for now, but some doubted how much impact it would have in the longer term. "It looks like we'll see a nervous battle between the BOJ and the speculators," Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities. "Hedge funds have expanded their asset-holdings to unprecedented levels, so even if it's a coordinated intervention, effectively it may be similar to one-country intervention, so looking mid- long-term, I'm not sure if they'll be able to curb it."

The Nikkei share average was up 2.7 percent, to stand down around 10 percent on the week and headed for its biggest weekly slide since the 2008 financial crisis. JGB futures fell.
Once more, FX battle is joined. While I doubt Japanese authorities will begin making "death to speculators" Mahathir-style pronouncements, now is probably as good a time as any for speculators to lie low.