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Japanese Yen Rises to Highest Since 1995 Against US Dollar, More Volatility Ahead (Euro Open)

Friday, 12 December 2008 04:15:46 GMT  |  Ilya Spivak, Currency Analyst

The Japanese Yen roared higher in overnight trading as the US Senate failed pass a vote that would have led to a decision on a bailout plan for America’s top three automakers. Risk appetite rapidly evaporated, sending stock index futures lower and pushing USDJPY to levels unseen in 13 years. Continued volatility lies ahead as these developments are compounded by a busy US economic calendar.

Key Overnight Developments

• Japanese Yen Soars to 13-Year High Against the US Dollar
• Senate Fails Procedural Vote on Auto Bailout, Sparks Knee-Jerk Volatility
• New Zealand Retail Sales Drop Most in Over 4 Years


Critical Levels



The British Pound gradually advanced past 1.50 through Asian trading but volatility linked to the auto bailout (see below) suddenly spooked the pair, with GBPUSD first pushing through 1.51 then falling 225 pips in a matter of minutes to hit 1.4974. Sterling corrected back above 1.50 as pandemonium subsided ahead of the opening bell in London. The Euro too saw knee-jerk price action, but EURUSD failed to break out of the 1.33-1.34 band it had occupied since early afternoon in New York trading.


Asia Session Highlights



New Zealand Retail Sales shrank -1.3% in October, down from 0.1% in the preceding month and lower than the 0.0% expected. The largest monthly drop in over 4 years, the result came as consumers shied away from big-ticket purchases eyeing rising unemployment, scarce credit, and shaky financial markets. Motor vehicles led the decline, falling -14.5%. Data released yesterday showed house sales tumbled -45.4% in the year through November. Despite continuously dour economic data, RBNZ Governor Alan Bollard has said that he expects the economy to resume growth in the second half of 2009, backing off explicit promises of further rate cuts. Traders have taken notice, paring back rate cut expectations by close to 60% just since last week.

The Japanese Yen roared higher late into the overnight session as US Senators debating a bailout for America’s top three automakers exchanged some choice words regarding a possible vote on the measure. Senate Majority Leader Harry Reid said lawmakers will not make it to the “finish line”, adding that he will “dread” watching Wall Street tomorrow. The comment was quickly followed by news that the Senate failed to pass a procedural vote would have allowed policymakers to weigh in on the measure itself. This sent US stock index futures lower by a whopping -4.5% in a matter of minutes.

The sudden evaporation of risk appetite across financial markets pushed USDJPY below the 90.00 level for the first time since 1995. The Yen is typically used as a funding currency for carry trades and tends to gain if risk appetite sends investors out of risky assets (including high-yielding currencies). Indeed, USDJPY is now 95% correlated with the Dow Jones Industrial Average.


Euro Session: What to Expect



France’s Current Account is likely to see the deficit continue to widen in October. Earlier this week, we saw the trade balance portion of the report show a greater-than-expected shortfall of -7.1 billion euro, down a staggering -85.8% from a year before. Exports fell -4.5%, the most in close to a year, as spreading global slowdown trimmed demand for French-made products. Imports too were in decline, down -1.0% as French consumers cut back spending with the economy inching toward recession and unemployment at the highest level in nearly a year. The capital side of the equation is unlikely to provide a counter-balance with the CAC 40 benchmark stock index down -6.9% and the Euro down -2.46% in October.

On balance, equity markets are likely to retain their status as primary drivers for forex price action. Hefty US economic data is on tap: Retail Sales are set to print down for the fourth consecutive month while Producer Prices expected at an annualized 0.2%, the lowest in nearly 2 years. Continued haggling over the bailout of the US’ top three automakers will only compound event risk, making for a volatile end to the trading week.


To contact Ilya regarding this or other articles he has authored, please email him at ispivak at dailyfx dot com.

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