Currency Intervention and Why the JPY is Called : “The Devil”

There was a Global-View member. a bank trader working for Japanese bank who gave the JPY a nickname I never forgot. He called the JPY “The Devil “  The reason, as he said was because “the YEN had destroyed more trading careers” than any other currency.

One look at this USDJPY chart will tell you why he gave the JPY its nickname.

Now I can go on telling you we warned about the risk of intervention but that is old news. So let’s discuss what may happen next.

Intervention is like an earthquake

A surprise central bank currency intervention, such as the BoJ attack on Monday, is like an earthquake. What I mean is that the first quake causes the most damage. What follows is a series of aftershocks that send tremors but does not inflict as much damage. Of course, there could be a series of earthquakes but in this case let’s assume the BoJ is looking to restore a two-way risk rather than reverse

The days that follow currency intervention……

The days following the interventions are like assessing the damage caused by an earthquake by sifting through the rubble. Those still standing have to assess the damage to their accounts. Those who survived (or even thrived) should consider themselves lucky (or good). Those who were not so fortunate and those who have lived through the currency wars have seen their account blown up.

In the days that follow traders are generally more reluctant to challenge a central bank, in this case the BoJ, but that does not mean they have given up the fight.

Looking ahead… Much depends on how the central bank plays the cat-and-mouse game. In this regard, Japan’s top currency diplomat Masato Kanda issued a warning on Tuesday that “We are ready 24 hours, so whether it’s London, New York or Wellington, it doesn’t make a difference,”

In the long run, traders will tell the BoJ to put up or shut up. In the short run they will be tentative pushing the market too far to prompt another attack.

Reminder: One key to trading an intervention market is to remember a stop is not a stop where slippage will likely be the norm, not an exception. This suggests playing it close to the vest to let the dust settle.

Barring any change in the fundamentals or a major shift in the technical picture, interventions face the law of diminishing returns. The means that the more times it is employed, the more traders will anticipate it and the less effect it will have.  With that said, stay on guard for aftershocks until the risk of a severe one has passed.

Contact jay@global-view.com with any questions or comments