TOKYO, Oct. 12, 2022—The next calamity could hit the yen and Japanese government bonds markets if nothing palpable emerges to stop the U.S. dollar’s runaway rise from the G-7 conference during the week of Oct. 9. An omen was out on Oct. 12, when the dollar climbed past a 24-year-high to above 146 yen, uncontested.
As part of Prime Minister Liz Truss’s U.K. economy stimulus policy, the Bank of England this week executed a 65 billion pound sterling purchase of U.K. gilt, only to sustain a splurge of selling, sending gilt yields soaring with 30-year surging 0.29 point to 4.68 and sterling sank to 1.1 dollars . It’s proof that in this modern time when financial transactions around the world exponentially grew thanks to computer-based trading, interventions don’t work.
But that’s what the BOE and the Bank of Japan did. The Japanese central bank sold 2.8 trillion yen worth of dollars on Sept. 22, 2022 to stem the soaring dollar against the yen. The result was no visible effect in stemming the dollar’s rise, and the currency rose close to 146.50 yen from around 145 yen on Oct. 12.
Years ago, currency speculators would use their ‘gut instinct’ for executing bids and offers, and central bank interventions were a visible fence of sort for executing their trades. Their thinking was that if they can jump the fence with trades that were more than intervention volumes, then they can continue running.
In the modern computer-based market environment, trades are mostly executed by computers that explore for the timing and market and intervention irrationalities to pour trades – the volumes that are likely to be hundreds of times more than in the past. That seemed to be what happened in Tokyo on Oct. 12, when the dollar jumped from 145.70-80 yen levels to the 146 yen mid-point.
The fence was crossed with no BOJ resistance. Smart computers must be looking for the next fence to cross.
Currency speculators’ trades are closely connected to other currency markets as well as, like in the U.K., the JGB market. On Oct. 11, in an onerous sign and for the first time since 1999, new 10-year JGBs, which are Japan’s bellwether bond, failed to be traded for three consecutive business days since Oct. 7. It clearly showed that wholesale investors want higher yields than what the Ministry Finance offered. The 10-year JGB was offered at 0.243 percent and bid at 0.25 Oct. 11, according to Reuters. The U.S. 10-year Treasury yield was close to 3.99 Oct. 11, resulting in a spread of more than 3.7 percentage points, the gap that’s widening further as the Fed is poised to continue tightening policy.
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