Market suspects yen intervention

Some dealers reported dollar buying over several days in the London and New York trading sessions. The Japanese currency spent most of past week hovering around the 120 level against the dollar, despite moves in other currency pairs against the greenback.

"The market has been devoid of direction in the last few days and we have been pinned to 120, which has given rise to the view that there has been covert action," said Jeremy Stretch, senior currency strategist at RBC Capital Markets in London.

Intervention taking place outside Japanese trading hours is not a new phenomenon, but the market is buzzing with talk about Japan’s ‘covert’ intervention style. In previous years authorities have been relatively open about market operations. Although intervention statistics continue to be published -- the latest data is due today (March 31) -- the method of intervention is much less transparent. UK bank HSBC keeps an intervention risk index and, said Adrian Hughes, currency strategist at the bank in London, this indicates a new style of intervention is now underway.

"We have seen a more methodological intervention process that has caught the market at positive extremes and targeted to move the index back to moderate levels," he said. "A new regime of covert intervention does have the market at a loose end."

Japanese authorities have been keen to limit yen strength for some time, but the fiscal year and quarter-end periods are usually hotspots for official yen weakening. Japanese firms with international operations must repatriate overseas profits to be booked in year-end accounts, and the weaker the yen, the better the repatriation rate. The practice is referred to in the market as ‘window dressing’.

Current market conditions have both good and bad implications for the success of Japanese interventions. Liquidity has dwindled as both corporate and institutional clients decline to take positions due to uncertainty over the length of the war in Iraq, giving any intervention a greater chance of success, and reducing the amount of FX reserves needed to make an impact.

However, analysts have reported a growth in short-term speculative trade in FX, something the Japanese authorities are not keen on.

"The problem is that much of the current speculative trading is creating one-way markets due to the war-related liquidity shortage," said an FX trader at a European bank in London.

Bank of Japan data already issued showed that Japan has already intervened to the tune of ¥1.2 trillion this year. In January the bank spent ¥678 billion, and ¥513 billion in February.