Well, it finally happened -- a clear break of 140. And it happened in
The selling of yen appears to mainly have been in Japanese names (meaning the big financial and corporate institutions).
Maalox moment. The struggle to get over the big figure was not without its violent moves. Especially on Friday, in the New York time zone. Traders faked themselves out with a rumor of intervention. Drove the buck down almost two big figures to 138.20 in a heartbeat. And then back up to 139.60 as the market came to its senses.
The Monday morning Tokyo move was a straight shot up over 140, a move that took out the fabled big-figure exotic outstrike barrier options. Some people had figured that holders of barrier outstrike options keying off the 140 level would defend by selling dollars to keep their options alive. Barrier outstrike options contain a poison-pill level at which they simply self-extinguish. Directional traders use them because they are cheap relative to normal options. The problem is that they blow up when you hit that magic level.
Actually, it's a lot like an ordinary stop-loss order. The only thing is that these options can enable very cheap, high-leverage trades, which can make them worth defending by trying to jam the spot market. Maybe it worked on Friday. But when the market saw the usual ministerial talking heads saying that
-- and not foreign exchange -- would be the topic of the upcoming
meeting, well, it was all over for the yen. Now we have some investment bank types calling for the
to crash and burn. They may be right. The stock market in Japan is overdue for a swift kick to below the 15,000 level.
Other Asian currencies are being caught in the crossfire. Even the
, despite the prime minister's protestations, is getting clobbered (now below 60 U.S. cents). Pressure is on the whole region.
has added to its own problems by restricting transactions in the offshore forward market (so-called nondeliverable forwards), resulting in a plunge in the stock market. And the currency is pretty shaky as well. Let this be a lesson to all present and future ministers of finance: If you want investors to own your equities, then don't obstruct their ability to hedge your currency. The vacancy light is always on at the roach motel -- if you can't check out, don't check in.
Hey, CNBC -- You're Reading Sterling Wrong!
Say you are a
anchor. They tell you to do the currency report. You look at the board and here is what you see:
Yen 139.50 +.25
Mark 1.7750 +.50
Pound 1.6335 - .25
What do you say? "The dollar rose by one quarter of a yen against the Japanese currency and by one-half pfennig against the mark. But it lost ground against the pound sterling." Every day you guys get it wrong -- even you, my main morning man
, though you are right in jolly old
-- the world's capital of foreign exchange dealing!
Here's what's wrong. The yen and mark are quoted in what's called European convention, or the number of foreign currency units equal to one U.S. dollar. When you give out a bid-ask quote you tell the exchange rates where you are willing to buy or sell dollars. The first two were read correctly because the dollar did rise against the yen and mark. Not true for the pound. Sterling (along with the Australian dollar and New Zealand kiwi) are quoted in American convention, meaning it takes 1.6335 U.S. dollars to buy one pound sterling. When you quote sterling you give the exchange rates at which you are willing to buy or sell pounds. So if sterling moved from 1.6360 to 1.6335, as is indicated above, then sterling -- not the dollar -- was the currency that fell! You can call it sterling, quid, spondooli, cable or even Betty Grable (rhyming cockney slang), but you can't quote it upside down!
Make that mistake in a foreign exchange dealing room (or my classroom, for that matter) and you are dead meat on the dessert floor.
David DeRosa heads a trading research firm and is an adjunct professor at the Yale School of Management. His column on international finance and trading appears Mondays, Wednesdays and Fridays. He welcomes your feedback at