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Markets

USD/JPY, EUR/USD Whipsaw at Start of Week's Trade

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Top Stories

  • BOJ injects 185B into system post quake
  • Euro bid on positive EU summit developments Friday
  • Nikkei off -6.18% on quake reaction, Europe off -0.88%
  • Oil below $99/bbl on JPY quake flows
  • Gold at $1426/oz.

Overnight Eco

  • JPY Revised Industrial Production m/m 1.3% vs. 2.4%
  • JPY Household Confidence 40.6 vs. 41.6
  • NZD REINZ HPI m/m 2.3% vs. -2.6%
  • EUR Industrial Production m/m n/a

Event Risk on Tap

  • CAD Capacity Utilization Rate expected at 79.1%

Price Action

  • USD/JPY rebounds to 82.00 after early dip to 80.60
  • AUD/USD holds support at 1.0060
  • GBP/USD holds 1.6050 in quiet trade
  • EUR/USD gaps open to 1.3970 trades down to 1.3920 but holds above Friday close

A very whippy Monday to the start of the week's trade as the currency markets tried to absorb the developing news over the weekend from Japan as well as react to EU summit on Friday which appeared to have made some progress on the sovereign debt issue front. USD/JPY initially spiked to a fresh yearly low of 80.60 as speculators bet on repatriation flows in the wake of the devastation caused by the quake and tsunami, but the pair quickly rebounded to trade above 82.00 after BOJ injected more than 165B into the financial system to provide liquidity.

The BOJ decided on Monday to loosen its monetary policy further in the wake of devastation caused by the country's worst earthquake on record. The central bank agreed to boost its asset buying program by 5 Trillion yen and purchase various financial assets and extend loans of up to 40 trillion yen. The decision however was not unanimous with Miyako Suda voting against it.

As we noted earlier, "One of the more cruel ironies of the this tragedy is that the strengthening of the yen due to these technical factors could not have come at a more difficult time for the export driven Japanese economy as it tries to rebuild its productive capacity in the wake of the destruction caused by the earthquake and the tsunami. If the USD/JPY remains at these levels or worse slips below the key 80.00 figure for sustained period of time, the country's ability to recover quickly from this exogenous shock may be severely compromised.

Furthermore, while the situation at the Fukushima nuclear plants appears to have averted the worst of the public health hazards, the fact that much of that energy generation capacity will be offline permanently suggests that the country's production up north could be negatively affected for months to come. For now yen continues to find support on repatriation flows, however if the net effect of the earthquake results in a sustained reduction in economic output combined with massive monetary expansion by the BOJ the long term impact of the quake could prove to be yen negative."

For the time being however, the repatriation impulse continued to dominate speculative behavior and USD/JPY drifted below 82.00 as the European markets opened for trade. Japanese officials are clearly concerned with the developments in the FX market and will likely intervene if yen appreciation accelerates as the week progresses. Japanese Finance Minister Yoshhiko Noda noted earlier today that the government will be watching the exchange rate carefully.

In the EZ meanwhile, the summit on Friday proved relatively positive with the union agreeing to expand the EFSF facility to 500 Billion euros, while offering Greece better concession terms on its debt. The EUR/USD gapped higher on the open today trading to 1.3970 but has since faded to fill the gap at 1.3905 as risk aversion flows on the European open pushed the pair lower.

Nevertheless the EUR/USD continues to perform well on perception of interest rate differentials and despite the natural disaster in Japan, European monetary officials show no signs of changing their mind regarding the planned monetary tightening next month. If that remains the case EUR/USD could firm up towards the 1.4000 level in North American trade if risk appetite picks up as the day progresses.

FX Upcoming

Currency GMT EST Release Expected Prior
CAD 12:30 7:30 Capacity Utilization Rate 79.1% 78.1%

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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