Word of the Day: Coordination

The G7 nations agreed to intervene in the foreign exchange market for the first time since 2000 and the UN approved enformcement of a no-fly zone over Libya. The net consequence has been to take the yen broadly lower.  The euro has rallied to above $1.41 on ideas, suggested by the Japanese finance minister that intervention could take place on euro-yen as well as dollar-yen.  The dollar-bloc currencies are bid, while sterling and the Swiss franc are a bit heavier. 

The intervention lifted the dollar from about JPY79 to about JPY82.    The JPY82.00 area is noteworthy.  It is around where the dollar was traidng prior to the nuclear crisis.  However, Japanese exporters are believed to have sold into the dollar rally and capped it near there.   Generally the first bout of intervention is the most effective and then a point of diminishing returns quckly is reached. 

Thee is all sort of wild talk about the size of the operation.  Two notes on this.  First, sorry, size doesn't really matter.  The foreign exchange market is bigger than the central banks.  Causing pain to the yen longs is the goal and it is not about the size, but about catching the market in terms of positioning and levels.  Second, the market is notoriously poor at estimating the sinze of intervention. 

There is also some sense that coordination is half hearted, especially and understandably in Europe.  The ECB, in particular, does not want to drive the euro even higher than its rate hike signals are already doing.  Nor does it necessarily want to accumulate more dollars.  It is possible that today's intervention is what was agreed upon and that outside of the BOJ, may not be repeated. 

Sterling has generally underperformed.  It is difficult to see the BOE taking much please out of selling yen and buying either euros or dollars.  Two events have taken place that has led to sterling's under performance today.  First, Deputy Governor Bean, who was thought to be moving to the hawkish side sounded a bit dovish last night, suggesting no hike next month.  Second the Nationwide's measure of consumer confidence plnuged to 38 a new record low.