Yen Continues To Strengthen, Euro Breaks 1.25 - Intervention In Store?

Daily Forex Fundamentals | Written by GFT | Oct 27 08 09:25 GMT |

Top Stories More Nikkei selling -5% off lows of session carry pressured once again as week starts Talk turns to intervention in JPY as Japanese authorities become concerned about rapid volatility and G7 singles out the yen BOK lowers rates by 75bp won falls to 1440 to the dollar IMF extends 16B loan to Ukraine trying to stabilize Eastern European EM IMF says working on package for Hungary next UK Telegraph - Europe highly vulnerable to currency meltdown with large exposure to EE and LA emerging markets Japan will expand the bank bailout scheme and continue to limit a short selling Oilcontinues to crater now approaching $63/bbl Gold above $700 at $730/oz last Overnight Eco JPY Corporate Services Inflation 0.1% markedly lower 1.2% 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 Price Action USD/JPY continues to strengthen as Nikkei drops 90 becomes the Maginot line for intervention? AUD/USD 60 level under threat as unwind continues GBP/USD still suffering from residue of awful GDP data 1.5500 next key level to break if risk liquidation accelerates EUR/USD1.2500 broken as risk aversion and troubles in Eastern Europe weigh 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 Currency GMT EST Release Expected Prior USD 9:00 5:00 EUR German IFO - Business Climate (OCT) 91 92.9 USD 14:00 10:00 USD New Home Sales (SEP) 455K 460K Boris Schlossberg http://www.gftforex.com DISCLAIMER: GFT refers to Global Futures & Forex, Ltd. and all of its divisions, branches and subsidiaries, including Global Forex Trading and GFT Global Markets UK Limited. 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