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Forex Research - Yen Continues to Strengthen, Euro Breaks 1.25 – Intervention in Store?

Yen Continues to Strengthen, Euro Breaks 1.25 – Intervention in Store? Last Updated 10/27/2008 4:08:33 AM EST (GMT +5)

Event Risk on Tap

  • EUR IFO market looks at another drop to 91.2 vs. 92.9
  • USD New Homes Sales forecast at 452K vs. 460K

    Yen Continues to Strengthen, Euro Breaks 1.25 – Intervention in Store?

    Risk aversion reigned supreme once again in the currency markets at the start of a new week as Nikkei dropped another 6%, USDJPY strengthened further and the G-7 finance ministers became seriously alarmed with the volatility in the markets. The finance ministers issued a joint statement noting, "We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability.” The G7 then added that they “continue to monitor markets closely, and cooperate as appropriate.”

    The message was a clear warning to the currency markets that have bid up the yen by more than 10% over the past month. For the time being the statement fell on deaf ears as the yen continued to gain ground on a very weak close in the Nikkei and a down opening for equities in Europe. Nevertheless, traders who ignore the G7 words do so at their own risk as monetary authorities in the industrialized world are clearly becoming convinced that the FX markets may be the next crisis hotspot that will require their attention.

    The trouble is that yen’s vertical rise occurred not only against the greenback, but against the euro and its major Asian counterparts such the Korean won and yuan as well.This leaves Japan – an economy for whom exports continue to be the primary engine of growth – with nowhere to hide. Already on Friday, Sony warned about the challenging business climate it faces in part due to adverse currency exchange rate movements. Today Cannon made the same point. With Japanese car manufactures suddenly very vulnerable to this massive dislocation in exchange rates we wonder how long the Japanese officials will tolerate this new trading climate before engaging in intervention.

    For now USD/JPY 90 level appears to be the Maginot line and should the unit cross it, no doubt the rhetoric will become more urgent as the yen targets its all time highs at 80. However, for intervention to work for more than just a few hours, the G7 will need to lead a coordinated effort of yen weakening not only against the greenback but the euro and pound as well. Clearly the authorities prefer for the market to stabilize on its own, hoping that equity selling will finally cease and spur a short covering rally.However, in the absence ofsuch a scenario, they may have to take mattersin their own hands and intervene directly.

    Meanwhile, the EUR/USD continued to be battered by both risk aversion flows on EUR/JPY and further worries over the stability of the European Union. The pair broke the key 1.2500 level as fears of economic collapse in former Soviet Bloc nations of Ukraine and Hungary further undermined the confidence in the unit.Newspaper reports over the week end suggest that European banks have enormous exposure to bothEastern Europe and Latin America suggesting that a currency crisis may be afoot. With equity markets in EZ showing nothing but red, the euro is likely to remain under pressure for the rest of the day. For now traders see no signs of support and until 1.2500 is recaptured convincingly to the upside neither do we.

    FX Upcoming

    USD9:005:00EUR German IFO - Business Climate (OCT)9192.9
    USD14:0010:00USD New Home Sales (SEP)455K460K

  • About The Author

    Schlossberg has more than 20 years experience financial trading on Wall Street. His daily currency research appears in numerous newspapers worldwide and Schlossberg serves as a regular contributor to CNBC's Squawk Box and Bloomberg radio and television. Read more >>

    DISCLAIMER: This forum and the information provided here should not be relied upon as a substitute for extensive independent research before making your investment decisions. Global Forex Trading is merely providing this column for your general information. This forum and its information does not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision based upon this forum or any information contained within. In addition, any projections or views of the market provided by the author may not prove to be accurate. Global Forex Trading and Boris will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained in this column. Global Forex Trading and Boris do not render investment, legal, accounting, tax or other professional advice. If such advice is sought, or other expert assistance is required, the services of a competent professional should be sought.


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