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Yen Rockets As BoJ Holds Off Further Stimulus; Greek Exit Fears Grow

Yen Rockets As BoJ Holds Off Further Stimulus; Greek Exit Fears Grow

Tzu-Wen Chen, Technical Strategist

Fundamental Headlines

- Eurozone Tells Members To Make Contingencies for “Grexit” – Reuters

- BoE’s ‘Finely Balanced’ Decision Keeps QE Options Open: Economy - Bloomberg

- European Banks Unprepared For Greek Exit From Euro - Bloomberg

- Euro Sinks To 21-Month Low As Greek Exit Fears Rise – Reuters

- Japan Stocks Fall On BOJ Decision, Exports, Ratings Cut - Bloomberg

European Session Summary

The US Dollar (ticker: USDOLLAR) traded higher against all major counterparts with the exception of the Japanese Yen as investors flocked to the safe haven currencies. Europe’s debt turmoil and mounting jitters over a Greek exit from the euro zone continued to weigh heavily on risk sentiment ahead of today’s EU summit. Greek exit contagion fears grew as the Eurogroup Working Group (EWG), consisting of experts who work on behalf of the block’s finance ministers, advised that each euro zone country should prepare contingency plans for the potential fallout of a Greek exit, highlighting the impact and realities of a ‘Grexit’.

The top market moving event overnight was the Bank of Japan’s (BoJ) decision to keep its monetary policy regime unchanged, retaining its key overnight call rate steady at 0-0.1 percent. The Board decided to hold back on further monetary stimulus after boosting its asset purchases last month to combat deflation and support the nation’s economic recovery. The yen rocketed against its major peers as the Bank’s statement cast doubt about its commitment to more policy easing.

Also in overnight news was the release of the Bank of England’s (BoE) minutes from its May monetary policy meeting. Policy makers opted to keep open the possibility that the Bank may expand its quantitative easing measures. This follows yesterday’s soft inflation print and calls from the International Monetary Fund (IMF) for looser monetary policy to further aid the U.K. economy, which has slipped into its first double-dip recession since 1975. The Sterling tumbled against the U.S. dollar to a session low of 1.5679 before trimming back losses.

Looking ahead, the top market events to watch out for will be the release of the Bank of Japan’s monthly economic report, and first quarter GDP prints from Germany and the U.K. Germany’s economy is widely expected to remain stable, with economists forecasting a 0.5 percent quarterly growth. Conversely, economists expect that the U.K. economy contracted for a third consecutive quarter. Also highly-anticipated are any developments that come out of the EU summit later today.

Taking a look at credit, pressure mounted in Europe under the weight of Greek exit fears, with Spanish and Italian 10-year bond yields rising 12.6 bps to 6.204 percent and 8.9 bps to 5.667 percent, respectively.

USDJPY 5-min Chart: May 23, 2012

Yen_Rockets_As_BoJ_Holds_Off_Further_Stimulus_Greek_Exit_Fears_Grow_body_Picture_1.png, Yen Rockets As BoJ Holds Off Further Stimulus; Greek Exit Fears Grow

Charts Created using Marketscope – Prepared by Tzu-Wen Chen

The Japanese Yen was the top performer, rallying against all its major peers as the euro debt crisis continued to weigh on risk sentiment. Investors sought safety in the yen and U.S. dollar, while the Bank of Japan’s decision to hold off on further stimulus bolstered the yen. Risk-correlated assets and higher-yield currencies such as the Australian, New Zealand and Canadian dollars were the biggest losers overnight, with the Aussie plummeting as much as 0.98 percent against the greenback.

--- Written by Tzu-Wen Chen, DailyFX Research

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.