Tuesday, August 9, 2011
The market has been witnessed sharp volatility from last week following events of Japanese Government
intervention, US rating downgrade by the S&P and ECB plans to buy Spain and Italy bonds.
Japanese Intervention in the FX market: Last week, the market witnessed the second intervention from the
Bank of Japan during the year in an effort to curb the Yen's appreciation. The BoJ intervened in the FOREX
Market in a unilateral move to sell the yen to stem the rally. The government noted that the BoJ would take
prudent action at the time, and the Bank injected 3.5 trillion into the market to stem the yen's gains against
majors mostly USD and Euro.
The BOJ followed Switzerland's intervention that also was due to the surge in exchange rates. Japanese policy
makers increased their efforts to help the economy exit from its worst phase and left the rates unchanged at
the lowest level. The bank also decided for the first time to expand the asset purchases fund, its main policy
tool since March as the Bank wants to introduce more stimuli to push the production cycle to help the
recovery rebound once again.
The USDJPY rose to 80.24 from low of 76.27 after the BoJ intervention and in India JPYINR August dropped
from 57.83 to a low of 55.78. However, yen started recovering on risk aversion from Friday’s US rating cut
and JPYINR has broken the high of 57.83 to trade above 58.00.
US rating downgrade by the S&P: Standard & Poor's played down the Congressional efforts and in a first
move lowered the AAA credit rating after the closure of Friday’s market. The agency lowered the U.S. credit
rating by one notch to AA+ and kept the outlook "negative". They also kept the possibility for another
downgrade if the they spending cuts are less than agreed, there are new fiscal challenges, or interest rates
The decision to raise the debt limit only in time on August 2 to prevent default, which took the debt ceiling
higher and enforced $2.4 trillion is spending cuts over ten years was not sufficient to S&P which preferred
nearly double the reduction of $4 trillion which cost the U.S. its top credit rating. Moody’s and Fitch already
refrained from the move to downgrade the United States rating after they reached the agreement to raise
the debt ceiling, yet kept the warning in place in the case the spending cuts were not enacted.
Posted by Morgan at 8:28 AM