TH: Yen action could lead to volatility: exchange rates
The Australian dollar, for example, raced from US65c to US94c between March and November last year with only shallow corrections. Since then, the price action has been far less exciting, but strong trends are under way in other currencies. The yen is one of those currencies. It hit a 15-year high against the US dollar.
For an export-dependent country like Japan, a strong currency is a big problem. Japanese companies compete with manufacturers on a global scale, and when its currency becomes too strong, profitability reduces or the price of goods increases.
In response to pressure from the corporate sector, Japanese politicians have threatened to intervene in the yen's value. However, the market has shrugged off the threats because they lack firepower. The last time the Japanese government bought the yen in the foreign exchange market was March 2004. The market does not believe the government will follow through on its threats, so I say to the Japanese government: Action speaks louder than words. If you really want to halt the rise in the yen, you need to come into the market and show them what you've got by aggressively selling the yen.
As the yen continues to rise, the possibility of intervention increases significantly, because the USD/JPY has never fallen below its 1995 low of 79.75. If the Japanese were to intervene in their currency, it would not only drive the US dollar higher against the yen, but also the Australian dollar. Short-term traders need to be particularly vigilant if this happens, because currency intervention triggers very sharp volatility.
