Mimicking central bank yen market rigging is great fun for commercial banks
Banks, Not Japan, Behind Post-Intervention Dollar Spikes
By Takashi Mochizuki
The Wall Street Journal
Friday, August 12, 2011
TOKYO -- In the days since Japan plunged into the foreign-exchange market Aug. 4, a number of suspicious spikes in the dollar have left the market wondering if Japan has now taken a stealth approach to intervention.
But Tokyo traders believe commercial banks, not the authorities, have been behind the sharp price swings.
Officials have been signaling they might intervene again at any time as the dollar keeps falling against the yen. Its steady drift lower has already put it below the Y77.10 level at which the government stepped in earlier this month. It was at Y76.70 late Friday in Tokyo.
A number of factors argue against an official hand, however.
Traders note that in all three known interventions going back to last September, Finance Minister Yoshihiko Noda announced the move. In no instance was the ministry found to have dabbled secretly. Such action would be easy to spot in the MOF's quarterly intervention numbers, which provide a day-by-day breakdown.
Another factor is the different price behavior following the initial move. On the days of the announced campaigns, the dollar kept rising throughout that day, whereas the suspicious spikes were followed by very fast declines.
Traders also say secret yen selling defeats the purpose of intervention and is a waste of money.
"The MOF may want to push up the dollar by several yen at least and alter yen-bullish market sentiment. Quietly intervening doesn't fit these purposes," said Tsutomu Soma, a senior dealer at Okasan Securities.
There are good business reasons for a bank to want to mimic official intervention. When the price spikes, market chaos ensues and traders are forced to instantly decide whether to join the bandwagon.
"As if they are ordering on behalf of the authorities, big commercial banks often buy a large amount of dollars -- say, $50 million or more at once," a senior dealer at a Tokyo bank said.
As the price soars, the originating bank is the first to sell, locking in a quick profit as others pile into a losing proposition.
The timing is carefully selected, such as when the dollar is about to reach a new low or when the market is very quiet.
And the bank can enhance the effects of such a surprise attack by spreading the rumor that they've been rate-checked by the Bank of Japan, which acts as the MOF's agent in currency intervention. A rate check is when the central bank calls traders to check prices Thursday, and is seen as a sign that Japan is concerned about the exchange rate.
"You buy a good sum, and tell your friends the BOJ just asked your banks for price quotes and may be about to make a deal," the senior dealer said. "And there's no way for dealers outside of your bank to confirm whether the bank was really checked."
On Thursday, dealers said the dollar surge was due to just such a rate check. Whether it really happened that way or not is still a matter of speculation.