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Yen Goes on a Rollercoaster Ride

Last updated 1/26/2010 2:41 AM ET (GMT -5) 9 Comments

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Boris Schlossberg

Director of Currency Research, GFT

The yen went on a rollercoaster ride during the Asian session trade today with USD/JPY first dropping to a low of 89.55 only to skyrocket back to 90.30 in matter of seconds as news of S&P downgrade of Japan swept the market. The yen initially strengthened on reports that Chinese monetary authorities have tightened bank capital requirement yet again spurring further risk aversion flows on fears that China is preparing to initiate a tightening monetary policy and a possible rate hike as early  Q1 of this year.

However, the trend in USD/JPY was completely reversed when news hit the screen that S&P put out a negative outlook on Japan.  The rating agency maintained the country’s AA status but changed the long term outlook to negative from stable. Trade in USD/JPY remained highly volatile as European session was set to open with the cross currents in the pair made against the background of the latest BOJ decision which left rates unchanged at 0.1%.

Some analysts have noted that the Japanese 3 month LIBOR rates are quickly reaching parity with US 3 month LIBOR - a trend that could ultimately prove bullish for the USD/JPY, as yen once again becomes the cheapest G-3  funding currency for the carry trade. However, the carry trade only performs well in low volatility environments that allow risk assumption to thrive. Presently the forces of risk aversion spurred by fears a vacuum of leadership in the US and growing evidence of monetary tightening in China are dominating trade flows across all capital markets, making the carry trade unpalatable to most FX participoants.

USD/JPY has been hovering around the psychologically key 90.00 level for the past several days and  will need a concerted rebound in equities to push higher. If no such rebound occurs within the next few days the pair could easily tumble to test support at 87.00 as risk aversion flows will trump any weak economic news from Japan.

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Comments (9)

hsbc

January 26, 2010 at 02:54 AM ET

The yen initially strengthened on reports that Chinese monetary authorities have tightened bank capital requirement yet again spurring further risk aversion flows on fears that China is preparing to initiate a tightening monetary policy and a possible rate hike as early Q1 of this year.

Just to clarify your statement on this. Reuters was the one who published a headline but without any clarification on the fact that it was previously mentioned. This cause panic selling in fx, stocks, commodities and mins later reuters wrote the full report saying that they news was previously released. Alas, the damage was done and this cause stop losses to be triggered.

Perhaps someone from reuters can clarify why did they release an old news without being clear.

hsbc

January 26, 2010 at 02:59 AM ET

Those morons at reuters dont even have the courtesy to come forward to explain.

alexjbrandt

January 26, 2010 at 03:32 AM ET

They were probably short on eur, aud, jpy, etc and wanted to make sure that their positions hit their t/p to make money. I wouldn't put it past them.

schultzz.at

January 26, 2010 at 04:02 AM ET

That's the exact reason why I am trying to avoid showing Pavlovian reflexes with regard to any news event.
As far as the Yen is concerned, it seems that Japan's large debt is of little concern to traders and I am operating on Boris' hypothesis that declining volatility is a prerequisite for Yen shorts.
Tom Schultz.

alexjbrandt

January 26, 2010 at 04:28 AM ET

lol. Just make sure you don't condition yourself to respond :P

I don't understand why anyone would want to buy Yen, much less consider it a "safe haven". Fiscally, they are worse off then the US and I'm pretty critical about US government finances/policies. The S&P downgrade of Japan from stable to negative seemed to be brushed aside by the market. Or else (as you pointed out) traders don't care that Japan has a debt that equals 200% of its GDP, no wonder why they are plagued with stagnant/deflationary growth. I believe historically, growth of a countries economy diminishes when the debt to GDP reaches 90%+. I'm surprised that the BOJ hasn't tried to talk the yen up giving that the new finance minister in his first speech talked about wanting a weak yen. I myself don't see a strong yen benefiting Japan economically since they are a export dependent nation. This week will be interesting.

bschlossberg

January 26, 2010 at 04:46 AM ET

Nobody buys the yen for safety. It rises simply because traders have to unwind yen shorts when risk aversion kicks in and specs jump on the bandwagon

alexjbrandt

January 26, 2010 at 05:03 AM ET

Ah, okay thank you for the clarification :)

wwwin

January 26, 2010 at 09:51 AM ET

All I got to say is I would not want to be long Yen when and if Bernanke is confirmed.

alexjbrandt

January 26, 2010 at 10:18 AM ET

They apparently have enough votes to confirm him.

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.