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U.S. Dollar Rebounds as Japanese Yen Onslaught Continues

U.S. Dollar Rebounds as Japanese Yen Onslaught Continues

Christopher Vecchio, CFA, Senior Strategist

Fundamental Headlines

- Europe Demands More Greek Budget Controls – Bloomberg

- France Joins Spain to Defy Moody’s Downgrade with $18.5 Billion Bond Sales – Bloomberg

- Jobless Claims Drop to near 4-year Low – Reuters

- Spanish GDP Shrank in Fourth Quarter – WSJ

- U.S., Afghans in Taliban Talks – WSJ

European Session Summary

Although higher yielding currencies and risk-correlated assets were mostly lower in the overnight, the real story is what’s going on with the Japanese Yen. Since the Bank of Japan announced it will inject another ¥10 trillion into the markets on Tuesday, the Yen is down over a percent a half against the U.S. Dollar. With the intervention coming ahead of the USDJPY breaking its all-time lows, it is clear that Japanese finance officials are taking a more preemptive stance in devaluing the Yen. This move has paved the way for a sustained rally by the USDJPY over the course of 2012, with my year-end target currently at 90.000.

Elsewhere, the situation in Greece may be getting worse behind the scenes, despite whatever hyper-bullish rhetoric European policy makers continue to spoon feed the markets. As opposed to taking what leaders say at face value, I believe it is more important to take note of the shift in attitude over the past few months. For example, for most of 2011, Euro-zone politicians stated that Greece leaving the Euro-zone was not even a possibility; then in late-October, German Chancellor Angela Merkel and French President Nicolas Sarkozy both acknowledged that it was a possibility for Greece to leave.

Yesterday, Greek President Karolos Papoulias blatantly attacked the Euro-zone core – the group tasked with saving Greece – saying, “Who is Mr Schaeuble to insult Greece? Who are the Dutch? Who are the Finnish?” This infighting is not to be taken lightly; the renationalization of Europe would result in a politically fractured continent and the breakup of the Euro-zone. For those that disagree, the cultural heterogeneity of the region will make it impossible to have sustainable peace over the long-term, and that a unified and peaceful Europe is an outlier in the grand scheme of human history.

USD/JPY 5-min Chart: February 16, 2012

U.S._Dollar_Rebounds_as_Japanese_Yen_Onslaught_Continues_body_Picture_10.png, U.S. Dollar Rebounds as Japanese Yen Onslaught Continues

Charts Created using Marketscope – Prepared by Christopher Vecchio

Overall, the Australian Dollar was the top performing major on the day, boosted by the stronger than expected labor market reading. Still, with the U.S. Dollar taking second place, at the time this report was written, it’s clear that demand for liquidity is starting to heat up; with the Japanese Yen effectively in a free fall, the U.S. Dollar is the next best option. The Yen was the worst performing major on the day, down nearly a percent against the Greenback. Overall, the Japanese Yen has been the worst performing currency this year, falling 2.42 percent this year against the U.S. Dollar.

24-Hour Price Action

U.S._Dollar_Rebounds_as_Japanese_Yen_Onslaught_Continues_body_Picture_7.png, U.S. Dollar Rebounds as Japanese Yen Onslaught ContinuesU.S._Dollar_Rebounds_as_Japanese_Yen_Onslaught_Continues_body_Picture_1.png, U.S. Dollar Rebounds as Japanese Yen Onslaught Continues

Key Levels: 14:10 GMT

U.S._Dollar_Rebounds_as_Japanese_Yen_Onslaught_Continues_body_Picture_4.png, U.S. Dollar Rebounds as Japanese Yen Onslaught Continues

Thus far, on Thursday, the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) is trading slightly higher, at 9852.12 at the time this report was written, after opening at 9842.63. The index has traded mostly higher, with the high at 9879.07 and the low at 9828.66. It is worth noting, however, that the index was falling sharply from its session highs at the time this report was written.

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, send an e-mail with subject line "Distribution List" to cvecchio@dailyfx.com

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