Event Study: Exchange Rate Moves in the Current Japan Crisis
US Dollar hits fresh highs against EUR, GBP, But Falls against the Yen and Swiss
Franc
FXStreet.com Wednesday Mar 16 2011
The Dollar rose further against the British Pound (GBP) and the Euro (EUR) in the last hours amid risk
aversion. The Japanese Yen (JPY) , the Swiss Franc(CHF) and the U.S. Dollar (USD) are once again rising
as investors fly from riskier assets amid ongoing worries about a nuclear crisis in Japan and arrest in the
Middle East.
The Yen has continued rising throughout today's session on the back of the Japanese crisis and risk
aversion. The Swiss Franc rose further across the board as risk aversion intensifies. The Swissy (nickname
for Swiss Franc) is trading at 2-month highs against the Euro and the Pound
Japanese Yen Hits Highest Against Dollar since 1995 on Radiation Concern
Bloomberg.com March 16, 2011
The yen reached its strongest level since 1995 versus the dollar as increased risk in Japan of radiation
leaks from crippled nuclear power plants boosted speculation investors there will bring home overseas
assets.
The four-day rally in the yen prompted speculation the Bank of Japan may intervene for the first time
since September in an effort to counter repatriation flows and shore up the competitiveness of Japanese
companies. The euro fell for the first time in four days after a Portugal credit downgrade revived
concern about the region’s debt crisis. The Swiss franc gained as violence in the Middle East and concern
in Japan prompted haven-asset buying.
“It’s a mix of risk aversion and repatriation that’s driving the yen to strengthen,” said Brian Kim, a
currency strategist at UBS AG in Stamford, Connecticut. “If there is repatriation coming back to Japan,
the stronger yen is making it even more expensive to purchase yen.”
“The more macabre headlines you see pertaining to the nuclear reactors, the more speculation you are
going to see over repatriation,” said Jessica Hoversen, a Chicago-based analyst at the futures broker MF
Global Holdings Ltd. “I think 80 is a line in the sand for the central bank.”
The yen rose 0.6 percent to 80.20 at 12:55 p.m. in New York, from 80.71 yesterday. It gained as much as
0.9 percent to 79.98 per dollar, the strongest since April 1995, when it touched a post-World War II high
of 79.75.
Next Move
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“There are real concerns that if it’s a disorderly move down in dollar-yen, the Bank of Japan may start to
intervene,” said Paresh Upadhyaya, head of Americas G-10 currency strategy at Bank of America Corp. in
New York. “This time around there will be support for unilateral intervention. In order for Japan to
regain competitiveness, they need a weaker yen. They can now build an economic case for that.”
In an attempt to slow the yen’s 15 percent appreciation last year, the Bank of Japan sold 2 trillion yen
($25 billion) in September in the nation’s first currency market intervention since 2004. Governments
and central banks intervene by selling or buying currencies to influence prices.
“A surge in the yen could be a destabilizing event, said Robert Sinche, global head of foreign exchange
strategy at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut. “I would
expect that they would intervene and that U.S. And European authorities would be fine with them
intervening here. If there’s activity required now, it would be the Federal Reserve acting on behalf of the
Bank of Japan.”
The euro dropped after Portugal was cut two steps by Moody’s yesterday to A3, four levels from socalled junk status. The company cited the nation’s “less supportive” economic environment and said its
outlook remained negative given Portugal’s “subdued growth prospects” and risks that the government
won’t be able to implement deficit-reduction plans.
Swiss Franc Record
The Swiss franc advanced to a record against the U.S. dollar on investor demand for a refuge amid
turmoil in the Middle East and Japan. Bahrain closed its stock exchange as clashes between security
forces and anti-government protesters intensified.
Concern that violence may spread to neighboring Saudi Arabia, the world’s biggest oil producer, damped
demand for higher-yielding assets and increased commodity prices. The Thomson Reuters/Jefferies CRB
Index of raw materials rose 1.1 percent after falling 3.6 percent yesterday.
“The focus will remain on Bahrain as well as Japan,” Kathy Lien, director of currency research with online
currency trader GFT Forex in New York. “For the time being, risk aversion will still be something that’s
more dominant in the market right now.”
The Swiss franc appreciated 0.8 percent to 90.92 centimes per dollar after touching 90.73, the strongest
level since at least 1971, when Bloomberg records begin.
The yen has strengthened 3.5 percent since Japan’s strongest earthquake on record last week caused a
7-meter (23 foot) tsunami that engulfed the northeast coast and damaged nuclear reactors. The yen
reached its postwar high three months after Japan’s 6.9-magnitude Kobe earthquake.
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Japanese Redemptions May Quicken South African Rand’s Drop, Push Turkish
Lira and Australian Dollar Lower
Bloomberg.com March 16, 2011
Emerging-market currencies from South Africa to Turkey are falling on concern Japanese families will sell
developing-country local bonds to fund the rebuilding of homes wrecked by the nation’s strongest
earthquake.
South Africa’s rand, the worst-performing emerging-market currency this year, will decline another 5
percent against the dollar following its biggest slump in 10 months yesterday as the Japanese unload
their Eurobond holdings, Societe Generale SA says. The Turkish lira will slide to the weakest level since
May, according to Guillaume Salomon, an emerging-market strategist at the Paris-based bank.
Japanese investors own about $3.9 billion of South African rand-based Eurobonds, known as uridashi,
more than the $3 billion of Brazilian real and $765 million in Turkish lira, according to data compiled by
Bloomberg. Japan’s mutual funds held 2.8 trillion yen ($34.6 billion) in Brazilian stocks and bonds as
their fourth-largest foreign assets, leaving the real among the most “vulnerable” during the selloff, HSBC
Holdings Plc said.
“When you’ve got a crisis like this, the initial reaction is shock, then people have got to access their cash
and start rebuilding their homes,” Guillaume Salomon, an emerging-market strategist at Paris-based
Societe General, said in a phone interview yesterday. “What we’re going to see is a reduction of
emerging-market portfolios as people are putting money back into Japan.”
Repatriation
Japanese investors will repatriate funds from other countries to finance the recovery, Pacific Investment
Management Co. Chief Executive Officer Mohamed El-Erian said in an interview with Bloomberg Radio
yesterday. The nation’s holdings include at least $50 billion of debt in real issued by the World Bank,
European Bank for Reconstruction & Development and Goldman Sachs Group Inc., according to
Guggenheim Securities LLC, a New-York based brokerage.
Investors in Japan have been buying bonds issued in the higher-yielding emerging-market currencies for
the past five years lured by yields as high as 9 percent, Salomon said. Japan’s main central bank rate is
between zero and 0.1 percent, compared with 11.75 in Brazil and 6.25 percent in Turkey. South Africa
cut its main borrowing rate to 5.5 percent last year from 12 percent in 2008.
The Brazilian real and the Australian dollar are the “most vulnerable” currencies and are likely to fall
against the Swiss franc and Norwegian krone, David Bloom, global head of foreign- exchange strategy at
HSBC in London, wrote in a note to clients, citing data from Japan’s Investment Trust Association. “The
flow could be most dramatic for the Australian dollar and Brazilian real,” Bloom wrote.
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Japanese Yen Exchange Rate (Yen per USD): March 5 – March 16, 2011
Swiss Franc Exchange Rate (USD per Swiss Franc): March 5 - - March 16, 2011
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