Anxious to revive its economy, Japan did not really need the thunderous return of risk aversion caused by fears of a "new Lehman Brothers" after the panic caused last week on financial markets following the announcement of the Emirate that he would ask the creditors of Dubai World to accept a moratorium on several billion dollars of debt.
This panic effect has led to a sharp rise in the Japanese yen which reached 84.81, the lowest level seen in the USD/JPY currency pair in 14 years. This developing situation amplifies the strength of the yen against the dollar, with the Asian currency already benefiting over several months from a differential rate in Japan-US rates: the three-month Libor rate, for the dollar is around 0.25 per cent, against 0.30 per cent for the three-month Libor in yen.
Given the urgency of the situation, the Japanese authorities have mobilised for action. This surge in the Japanese yen has revived expectations for a possible intervention in the foreign exchange market of the Bank of Japan (BoJ). The Minister of National Strategy, Naoto Kan, said that the government and the BoJ would act together to deal with the rising yen and that they are considering all options on what action to take.
The Japanese Finance Minister, Hirohisa Fujii, raised the idea of a G7 statement on exchange rates, said that the rise of the yen against the dollar penalises Japan's economy and its exports, and has shown concern over the current situation: "I think that it might be considered unusual that such a situation continues." The Prime Minister of Japan, Yukio Hatoyama said that "sudden and large movements on the foreign exchange markets are not desirable".
Japan fears that a strong yen will once again plunge the country into a new period of deflation, which it has just come out of. Direct interventions on the foreign exchange market are expected soon, in order to slow or even halt the rising Japanese yen. The extremely low level of the dollar against yen is expected to attract many speculators to take positions on the rise.
In the eurozone, the European Central Bank will announce, today, whether they have decided to change interest rates. Investors will watch out for every element which may indicate a future tightening of monetary policy, meaning that the eurozone is well on the road to recovery. According to some sources, an important announcement is expected during this year's last meeting of the ECB's governing council. Given the modest level of economic recovery and inflation expectations well anchored, a higher rate of refinancing is not expected for several months at least. However, the ECB could use this meeting to begin withdrawing its unconventional measures. The range in EURUSD 1.4800 - 1.5100 is to be monitored carefully. Our bias is still towards a fall of EURUSD to 1.4300 as long as it remains below 1.5150.
Upcoming FX Key events
The US non-farm payrolls number and ECB meeting are the key releases this week. Other data this week include in US ISM Manufacturing and the Chicago PMI, which are expected to show further expansion. On the housing front, pending home sales and construction spending are both due.
FX Technical Key points
EUR/USD is bearish, target 1.4300, key reversal point 1.5150
USD/JPY is bullish, target 98, key reversal point 80
GBP/USD is bearish, target 1.5050, key reversal point 1.7000
USD/CHF is bullish, target 1.1000, key reversal point 0.9950
AUD/USD is bearish, target 0.7800, key reversal point 0.9400
NZD/USD is bearish, target 0.6200, key reversal point 0.7650
Mr Longchamp is head of trading at RTFX Ltd.
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