Lehman-Greece parallels du jour (III) | FT Alphaville

Lehman-Greece parallels du jour (III)

What’s going on with the yen? And what does it have to do with Greece?

The Japanese currency managed a surge on Thursday, then promptly fell over:

Friday’s FT has some detail:

The Bank of Japan moved to offer Y2,000bn ($21.6bn) in overnight liquidity on Friday to “increase markets’ sense of security” because of turmoil resulting from the debt crisis in Greece.

It is the bank’s first exceptional offer of overnight funds since the scare over Dubai’s sovereign debt in December 2009 and its biggest since the height of the financial crisis in December 2008.

The move shows that fears about sovereign debt default in Europe are rippling across global markets, with the Bank of Japan the first central bank to react by adding liquidity. This, however, does not reflect any significant market disruption in Japan or any fears of contagion to Japan, despite its own debt woes.

Instead, the bank’s action reflects global demand for dollar liquidity as investors move out of the euro. That has pushed up short-term US dollar interest rates and created a knock-on demand for yen liquidity as a substitute.

Rumours of a dollar shortage have been floating around for a while now.

It is something that is very reminiscent of the weeks before and after Lehman’s collapse in 2008.

At that time, the Federal Reserve initiated a bunch of currency swap lines with other central banks to help ease the USD shortage. The issue then was that banks had run out of the US currency because of the impairments they had to take on dollar-denominated assets.

Anyway, it’s a similarity not lost on some market participants.

From Dow Jones:

Concern that a sovereign debt crisis in the euro zone could spread across the region’s periphery has moved from hitting just the common currency and government bonds to all asset classes, said Sebastien Galy, currency strategist at BNP Paribas in New York. The panic washing over the market is forcing a “massive deleveraging,” he said, turning the contagion worries into a full virus.

“It’s similar to what we saw in the Lehman crisis,” Galy said. “We’ll probably get very massive jumps, very, very fast.”

All hail the new volatility.

Related links:
FX gyrations – FT Alphaville
Another dollar shortage? – Economic Reality Blog
Lehman-Greece parallels du jour – FT Alphaville
Lehman-Greece parallels du jour (II) – FT Alphaville