Sunday September 19, 2010 - 10:14:05 GMT
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Forex Blog - How do you trade an intervention market?
How do you trade an intervention market?
I donâ€™t know about you but I care about my financial health and am not willing to stand in front of a Japanese bullet train as it comes barreling down the tracks. The speeding train was the BoJ, which intervened on a massive scale Wednesday with USD/JPY buying totaling an estimated Y1.8 tln ($21+ bln).
For many traders all they know about intervention is what they experienced with the ill fated Swiss National Bank intervention attempt this year. In this case, the Swiss National Bankâ€™s unilateral intervention in EURCHF failed to turn the currency and led to sharp fall to new record lows once its so called 1.50 line in the sand level was broken.
Is the BOJ intervention different than that of the SNB? What is its line in the sand? According to Shanghai bc, a highly respected member of the Global-View Forex Forum, with keen insights into the jpy:
I have never seen Mof/Boj losing in intervention wars on long-term basis, say in several months time frameâ€¦The record is since 1976 till nowâ€¦The market can always move against Mof/Boj intervention lines even for several months or even thousand pips but Yen always managed to come back to the intervention lines and beyond..Mof/Boj has enough weapons and tricks to make sure that..That is a very important point for long-term to medium term traders..The line is 83 this time.
So, while the market is currently treating 85 as the line in the sand, the brief break of USDJPY 83 appeared to be the level that set off the current wave of intervention. This is a level to keep in mind as a skeptical market backs off and waits for the next intervention attack.
The Days After:
What I found interesting is the price action in the following days as it led to volatility in other currency pairs while USD/JPY traded a mere 69 pip range (85.23-85.92) on Thursday-Friday. It then settled into an even tighter range. Every time I looked up on those days it seemed to trade within 85.65-85 with any blips outside of it not going far. What this did was put the burden on other currencies, such as EUR/USD to bear the brunt of cross flows into and out of EUR/JPY as USD/JPY barely moved. This helped the EUR/USD early on Friday but then saw it go into sharp retreat when EUR/JPY gave back some of its gains when the focus shifted to fresh concerns over Ireland sovereign debt. EUR/USD bore the full brunt of the EUR/JPY dip as USD/JPY barely moved (note euro fell across the board so this was just one factor).
One explanation for the lack of USD/JPY movement following the surprise intervention (more by its timing and massive scale than the event) is that Japanese exporters, looking to hedge their exposures ahead of fiscal September 30 half year end, are pitched in a battle with the authorities. Another is that speculators took a hit and have backed off. In any case, enough damage was done in this first round of intervention to force the market to back off. For an excellent explanation of Japanâ€™s intervention and whether or not it might succeed, I suggest reading this article, BoJ climbs into the ring, in our Forex Blog
What does this mean for forex traders? These are the early days of intervention and a time when speculators are less likely to challenge central bank resolve. A test usually comes afterwards as repeated interventions tend to have a diminishing effect. For the MoF/BoJ, the goal is to convinced exporters, through its actions, that USD/JPY is headed higher and that they should raise their sell orders to higher levels. For forex traders, it is important to keep an eye on USD/JPY to see if it is moving. On those days when it moves, cross offsets will have less impact on other pairs vs. the dollar. On those days when USD/JPY gets locked in a tight range, you need to keep an eye on the JPY crosses even more closely as other currency pairs will see exaggerated volatility since they have to bear the full brunt of any cross moves in both directions. Let the games begin!
Jay Meisler has been trading the forex market for more than 30 years, as an interbank dealer, fund manager and independent trader. He is a co-founder of Globa-View.com, a leading forex discussion site and home of the original forex forum. Global-View is a place where traders come for forex trading ideas, latest rumors, flows and breaking news.
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