Yen on a one-way bet

Monday’s dealings in equities saw the major market indices flip-flop around the unchanged mark all day long until trading ground to a halt on a rather sour note at intraday lows. Such ebb and flow helped restrain the dollar from marching away to the upside as investors whiffed the scent of further slowdown for global economies. Things appear to have come to a head on Tuesday with markets braced at the edge of a precipice ahead of key U.S. economic data likely to further unnerve investors already concerned by the extent of impending slowdown. The dollar is up along with the yen, while yields have continued to tumble after the Nikkei 225 stock index edged to a 15-month low. Its sub-9,000 close means that the Japanese index has now shed 21.1% since peaking and technically implies a bear market.

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Japanese yen – The weakening in Japanese stocks tightens investors’ stranglehold on the yen, which continued its ascent once again today. There was no fresh data to drive investors’ fears, already plagued by a virtuous death spiral of rising yen and declining stocks. The Japanese unit reached its highest versus the euro at ¥106.11 since September 2001 in the aftermath of a bursting technology bubble. Against the dollar the yen again punctured a 15-year high to reach ¥84.15. The head of steam building within this pressure cooker continues to create tension between business leaders and the government. According to press reports, the Prime Minster will meet business heads on Tuesday to discuss the implications of the strength of the yen. Clearly no decisions have been made on intervening in the currency market at this stage, which has created a virtual one-way bet on a strengthening yen. The more the yen gains, dealers face increasing vulnerability to a shock good-news report or G7 accord on intervening for the benefit of settling the Japanese economy.

Euro – Comments from Nobel Prize-winning economist Joseph Stiglitz to an Irish radio station today once again raised the potential for a double-dip recession following the decisions taken by EU-member governments to focus on fiscal health through spending cuts. Mr. Stiglitz again raises the prospect that such cuts after economic rout sound the alarm bells over the state of recovery. The euro tumbled to surrender half of its rally from the 2010 low at $1.1876 up to $1.3334 earlier this month. It declined to $1.2604 after an IFO German business climate index dipped to 105.7 in August from 106.2 last month.

U.S. Dollar – The dollar rose by 0.42% in early trading against a basket of major trading partners. The index stood at 83.44 at 8 a.m. ET on Tuesday. While one month ago it was euro strength underpinned by a rising tide of economic indicators, the pattern has now changed. The dollar is vying for the mantle of currency supreme despite the huge loss of yield payable on U.S. fixed income telling us that investors know where to go in times of economic uncertainty.

British pound – In an interview with the “London Times” newspaper, Bank of England policymaker Martin Weale highlighted the recent assumptions adopted by the central bank in its latest economic forecast in which the growth rate was slashed. His comments that the chance of the domestic economy facing a return to recession are “substantial” have driven the pound to a one-month low against the U.S. dollar and reversed a streak of outperformance against the euro. The pound fell to $1.5373 while the euro advanced to buy 82.11 pence at its intraday best. The negative tone for the pound was also endorsed by a shortfall in mortgage approvals for July perhaps indicating a lower consumer confidence in taking on significant commitments.

Aussie dollar –The Aussie dollar couldn’t bear the growing heat from the Japanese kitchen. Signs of trouble for the Japanese economy reflected by growing demand for yen coupled with evidence that the Chinese economy is cooling are weighing heavily on the Aussie. The political uncertainty certainly doesn’t help at this point. The Aussie dipped versus the dollar to a one month low at 88.12 U.S. cents while against the yen the unit slipped to ¥75.25 – also its lowest in four weeks.

Canadian dollar – Regardless of the outcome of Tuesday’s retail sales reading for June, the Canadian dollar isn’t looking so clever anymore. The driver is no longer the health of the domestic economy but the weakening of its biggest export market to the south. Ahead of today’s report the unit slumped to a six-week low at 93.90 U.S. cents.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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