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Dow Jones Tumbles, Japanese Yen Breaks 80 on Nuclear Risk

Dow Jones Tumbles, Japanese Yen Breaks 80 on Nuclear Risk

2011-03-16 16:24:00
David Rodriguez, Head of Product
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The Dow Jones Industrial Average tumbled and the Japanese Yen broke to fresh 16-year highs against the US Dollar on fresh fears over risks at the Fukushima Dai-Ichi power plant.

European Energy Commissioner Oettinger fanned fears as he told a European Parliament committee that “the [nuclear] site is effectively out of control,” and the situation is somewhere between “a disaster and a major disaster.” Frayed market nerves meant that the comments instantly sparked sharp sell-offs in ‘risk’; the Dow Jones Industrial Average nearly 200 points in the 20 minutes following the commentary.

Dow Jones Industrial Average Reaction to Japanese Nuclear Risks

Japan_nuclear_risk_japanese_yen_body_Picture_3.png, Dow Jones Tumbles, Japanese Yen Breaks 80 on Nuclear Risk

Source: Bloomberg

Reactions in forex pairs were similarly pronounced as the US Dollar/Japanese Yen pair plummeted to fresh 16-year lows. Current market price is well-below where the Bank of Japan was rumored to intervene through yesterday’s price action, and one gets the sense that the interventionist central bank is increasingly close to selling JPY in the face of incredible strength.

US Dollar/Japanese Yen Currency Pair Reacts to Japan Nuclear Risks

Japan_nuclear_risk_japanese_yen_body_Picture_4.png, Dow Jones Tumbles, Japanese Yen Breaks 80 on Nuclear Risk

Traders should use great caution in Japanese Yen positions and broader forex trading as conditions remain especially volatile. Indeed, the closely-followed US S&P 500 CBOE Volatility Index (VIX) has subsequently spiked to its highest since August of last year.

European Energy Commissioner Oettinger went on to clarify that his assessment on a potential “major disaster” was based on information from the European Union, Japanese Government, International Atomic Energy Agency, and media reports. This in turn suggests that he had no new information when he sounded alarms on the Japanese power plant. The current market sell-off could just as easily be retraced if traders re-enter ‘risk’ positions. Yet such actions seem admittedly unlikely as uncertainty reigns supreme. Watch for downside risks on equity indices and upside risks to the resurgent US Dollar amidst a broader correction in sentiment.

Written by David Rodriguez, Quantitative Strategist for DailyFX.com

To contact the author of this report, write drodriguez@dailyfx.com

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

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