Currency markets were turned upside down in overnight trade after the Group of Seven industrialised nations held a conference call and agreed to weaken the Japanese yen by direct intervention. Central banks took action by directly selling yen in the spot market against most major currencies, sending the yen sharply lower. The intervention alongside a more upbeat assessment at the Fukushima nuclear site is providing a shift in risk appetite. Investors are apparently a little more apt to take on risk which is supporting the so-called commodity currencies such as the Aussie and New Zealand dollars, while at the same time hurting the safe haven Swiss franc. It has been over a decade since the G7 decided to intervene with such force in currency markets. Additionally, investors will take the UN’s decision to impose a no-fly zone over Libya into consideration. The action is already pushing the price of oil higher and weakening dollar crosses.
Sterling
Sterling found some support after the Bank of England announced that its survey of inflation expectations showed Britons think prices will rise more rapidly in the coming 12 months. The rise in inflation expectations again puts the central bank’s credibility at risk.
US dollar
The US dollar is under pressure for several reasons. First, G7 nations agreed last night to coordinate intervention in currency markets to weaken the Japanese yen. Second, the price of oil has bounced after the UN has approved measures to enforce a no-fly zone over Libya and opened the way for military intervention. In Yemen, protests continue to see increased bloodshed, while the head of the UN has warned that the Bahraini crackdown may have been illegal. The renewed focus on Middle Eastern and North African geopolitical tensions has caused the price of oil to increase and oil prices have an inverse relationship with the value of the dollar.
Euro
The European Banking Authority released this year’s stress test criteria. Stress tests conducted on many European banks last year were discredited after several banks passed the tests, but then went on to collapse. This year, the test will incorporate a steeper decline in the EU’s growth forecast, but the tests still avoid delving too deep into the total amount of sovereign debt held by banks, instead opting to look at the “trading book” value.
Japanese yen
The Japanese yen fell sharply in overnight trade as a result of coordinated intervention by the G7 nations. The rare G7 statement on currency movements paralysed the yen’s move higher that has been seen since last Friday.
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