   |
|||
Déjà vu, Spike Rally in Japanese yen Spooks Global MarketsBy Gary Dorsch Perhaps the most important market in the world today is the vast network of foreign currencies, where total trading volume, including derivatives and futures, average around $2.9 trillion a day. This is ten times the size of the combined daily turnover on all the world's equity markets. And as world's economies have become increasingly integrated, so have the foreign exchange and global capital markets. And the size of the foreign exchange market is mushrooming each year. FX trading increased by 38% between April 2005 and April 2006 and has more than doubled since 2001. That's not surprising, since 18 of the top-20 central banks around the world are tolerating double-digit growth of their money supply. Therefore, fluctuations in the foreign exchange market are bound to become more violent. But the foreign exchange market is only one piece, albeit a very important one, of a bigger puzzle. Turnover of interest rate, currency and stock index derivative contracts rose 24% to a mind boggling $533 trillion in the first quarter versus the previous quarter, underscoring the enormous leverage in the global markets. Thus, any major unexpected event can touch off a panicky and violent market reaction.  But it all starts with the foreign exchange market, the first port of call, for global investing. Central bankers have several tools at their disposal to influence foreign exchange rates, including verbal "Jawboning" to the media, outright intervention in the spot or futures market, or adjustments to short-term interest rates. But managing the direction of foreign currencies becomes more daunting, as the global money supply mushrooms each year, attracting more speculators to the markets. Among the Group of Seven central banks, which oversee two-thirds of the world economy, the Bank of Japan is the most interventionist, working hard each day to guide the value of the Japanese yen to target ranges. But over the past two weeks, the Bank of Japan lost its influence over the dollar /yen exchange rate, after trying to keep the greenback in a range of 120 to 124-yen. Earlier today, the dollar tumbled below the psychological 120-yen level, and quickly slid to as low as 118.50-yen, outside the realm of market expectations, and shaking global stock markets, much like an earlier episode in late February and early March, which saw the dollar plunge to as low as 115-yen.  That was a big surprise, because the BoJ is so adept at managing its currency to its desired target ranges. In the past, as recently as Feb 9th, US House Democrats complained to the US Treasury chief about the clandestine operations of Tokyo's financial warlords. "We believe that a weak yen is a reflection of Japanese government policy," wrote Reps. Charles Rangel, Barney Franks, John Dingell and Sander Levin. "The Japanese government should be selling the massive reserves it has accumulated thereby changing the imbalances with the dollar and the Euro," they said. "The huge misalignment of the Japanese yen is giving Japanese auto manufacturers an unfair and undeserved trade advantage over US companies," said Stephen Collins, President of the Automotive Trade Policy Council on July 24th. "It's clear that the primary beneficiary of Japan's 25% to 30% undervalued yen is the Japanese auto industry, which is reaping a $4,000 to $10,000 yen subsidy for every vehicle it ships to the US," Collins said. But Treasury chief Paulson has always defended Tokyo's cheap yen policy. "I think the big point is the Japanese have a currency that is traded in an open and competitive marketplace based upon economic fundamentals," he argued on Capitol Hill, on February 1st. (Global Money Trends' special report for July 27th, reveals an important clue on how to detect when Paulson's Plunge Protection Team, is operating in stock index futures. http://www.sirchartsalot.com/newsletters.php The extent of Tokyo's intervention operations can be gauged by the size of its foreign exchange reserves. Tokyo controls a record $913 billion of foreign currency reserves, second only to China's $1.33 trillion, and mostly held in US Treasury securities. Japan's reserves ballooned after selling 35-trillion yen in 2003 and the first quarter of 2004, in exchange for 330 billion US dollars. Tokyo controls a record $913 billion of foreign currency reserves, mostly held in US Treasury securities. Japan's reserves ballooned after selling 35-trillion yen in 2003 and the first quarter of 2004, in exchange for 330 billion US dollars. Japan's FX reserves have continued to climb with a higher Euro, and a build-up of interest income from US bonds. The BoJ earned 3-trillion yen ($25 billion) of interest income last year, while paying 7.5 billion yen in interest on short-term T-bills, issued to finance past intervention, and is therefore, the world's largest "yen carry" trader.  To read the rest of this article, please click on the link below, http://www.sirchartsalot.com/article.php?id=63 Jul 24, 2007 321gold Ltd |
