Tip of the Day.

Foreign Exchange Intervention Focus: 

Foreign Exchange intervention is defined as FX transactions conducted by monetary authorities with the intention of influencing exchange rates. With the demise of Japan's economy, the Bank of Japan has frequently intervened in the open market to maintain a weak yen policy against the USD. They do this because a weak yen against the dollar will increase the American demand for Japanese goods. It has been reported that the BOJ stepped in with over $50 billion in currency interventions in 2003. It has also been reported that they are getting the most bang for their buck, by leveraging their trades.

The Ministry of Finance is responsible for all of the details of the intervention, including the amount, currency pair to trade, and the method of intervention. The Foreign Exchange Special Account provides the funds. The Bank of Japan conducts the foreign exchange operations as an agent for the Ministry of Finance.

How can this be used?

The Bank of Japan, like any other government or institution, cannot control the price of a currency in the long run. What they must do is choose significant levels and times to intervene, and hope that they will cause a snowballing effect of yen selling. This incorporates technical analysis with fundamental strategy. What a trader must do is anticipate when and at what price levels they will come into the market, as this can lead to profitable opportunities in the short run.

This graph shows a three-year chart of USD/JPY. You will clearly see a head and shoulders formation, with 115 being a long-term neckline. This was a very important technical level, as a break of this level brought many sellers into the market. The natural inclination of the market for the past few years has been USD selling, which would make one think that the market should have driven USD/JPY down. However, BOJ intervention has actively kept the level from dropping below that rate. In fact, on May 19, 2003, the price reached a low of 115.07 (its lowest level since February of 2001) before shooting up almost 200 pips in a few hours, and reaching an intra-day high of 117.50.

Although it has been rumored that BOJ has increased the level at which they will support the pair's price, the steady increase recently does not give us a great trading opportunity.

However, if price does drop in the near future, you may expect to see sharp and quick increases, mainly due to the BOJ.