Archived IMT (2010.08.18)

YENs TRADE-WEIGHTED INDEX http://chart.ly/4dt85t the chart in the link is Deutsche Banks JPY Traded-Weighted Index, showing the currency testing the highs of January 2009. Despite the similarity of the price pattern with Jan 2009, there are differences. GLOBAL BOND YIELDS TODAY are dragged by a more secular force than in early 2009 when the primary reason to falling yields back then was simply aggressive deleveraging from tumbling world markets. Today, the combination of slowing global growth and disinflationary pressures is weighing on bond yields, which discourages Japanese investors search for foreign yield. THE LAST YEN-SELLING INTERVENTION cycle from the Bank of Japan occurred between Jan 2002 and March 2004 (spent 35 trln yen), during which US fed funds rate hit a then 4-decade low of 1.00% and deflation was the Fed's main price fear. The Greenspan put of 2001-3 weighed on the US dollar, prompting Tokyo to act against excessive yen strength. The main reason to why Japans interventions ended in March 2004 was the Feds eventual signalling of higher interest rates, which materialized in June of that year. As long as markets expect the Fed to engage in a new round of asset purchases later this year, chances of operational (not verbal) FX intervention from Japan are minimal. The golden rule for any successful central bank intervention is for interest rate policies to be in line with the currency preferences of the central banks. And so as long as the Fed hints, signals or keeps the door open for new QE options, USD will remain pressured, particularly against the yen. I continue to expect 81 yen to appear in late Q3 and any intervention will be limited to verbal jawboning.