Yen Breaks 109 as Risk Liquidation Continues

More worries about the deepening effects of the credit crunch pushed global equity indices lower tonight taking USDJPY below the 109.00 figure for the first time since June of 2005 as carry trades were liquidated across the board. The downgrade of Credit Swiss and BNP by Goldman Sachs pushed the Nikkei lower by 2.5% and triggered a lower opening in European bourses as well, resulting in a swift sell off in the currency market especially amongst the high yielders such as the Aussie which plunged nearly 200 points from the days high.

The yen continues to benefit the most from the unwind of the carry and is also strengthening on the assumption that US rates are headed lower. Yesterday’s FOMC minutes suggested that the committee members saw little upside inflationary risk opening the way for the Fed to lower rates another 25bp in December. As interest rate differentials compress further in USDJPY, the yen will becomes less and less vulnerable to carry trade flows.  Traders are already eyeing the 100 level as a potential intermediate term target and Japanese officials are clearly becoming worried about the prospect of rapidly appreciating currency. The Japanese economy is far from healthy and any sudden increase in the value of the yen could create significant deceleration in export growth further hurting the country’s recovery. Japan’s Trade and Industry Minister  Akira Amari  noted that while 110 was the appropriate level for USDJPY but a drop to 100 would be too severe.

Meanwhile the release of BoE minutes revealed that the MPC voted 7-2 to keep rates steady with David Blanchflower and John Gieve voting in favor of a 25bp cut. The vote count was expected but nevertheless triggered selling in the GBPUSD with the pair dipping below the 2.0600 figure as traders worried that the committee may be on the verge of initiating a 25bp cut as early as this December. EURGBP which we noted yesterday was likely to strengthen further rose to within a few points of the 7200 level as interest rate expectations for UK and EZ continued to diverge.  If US equity markets follow the global lead expect more pound and euro selling as the day wears on.