Decline and fall

One of the principle reasons why many traders refuse to get involved with the Japanese yen is because of situations such as today’s, where intervention by the Ministry of Finance manipulated the value and sent it spiralling in early Monday trading. The continuous habit of attempting to control the value of the Yen is seen as both a frustrating feature of the not-so-floating exchange rate and a good opportunity for volatility traders to become active in the currency. Whilst it may have dropped by almost 4% from the moment of intervention against the USD, it made a steady recovery as this predictable overreaction and covered about a third of these initial losses throughout the day. Despite this, the latest intervention by the government has done nothing to reinforce investor confidence in the JPY as being a safe-haven currency. On the contrary, the USD has little competition in times of volatility and market uncertainty, a reason why it may continue to rally in the medium term.


The Euro, on the other hand was not quite as fortunate as the Yen in clawing back some losses as the markets proved how fickle they could be and demonstrated a certain degree of naivety towards last weeks positive proclamations. Despite only falling around 1.5%, it was the manner of the decline which took traders by surprise. From a technical perspective, having made considerable ground on Friday, it failed to find any significant support from the levels that many intraday traders would have been looking at. Again, this was principally because it was a fundamental-driven decline with the news that inflation was still at a 3-year high. This surprise, coupled with last weeks assertive announcement of a refinancing of Europe’s banks, raises questions of whether further inflationary money-pumping is really what the market needs right now.


The Eurozone banks were heavily discounted in trading today with several of the major banks down between 8-9%. This is a reaction to the manner in which these large financial institutions are going to have to recapitalise in order to be deemed ‘safe’ to lenders. Having to have a certain amount of capital is central to this problem with the only viable possibility being the introduction of new shares which will obviously result in the devaluation of shares currently in circulation. One of the major concerns here is that banks need more capital but the availability of lenders to supply this is becoming sticky.

Capital markets are in danger of grinding to a standstill unless banks and governments of these countries can convince lenders of the safety of their investments. Add to this the bond yield of countries such as Italy, which has hit 6.1%, and the viability of finding a willing lender becomes significantly less. As Italy demands more cash to be able to pay off its loans, its faltering economy demanding outside intervention, lenders are not going to be throwing themselves forward. The Euro bailout fund requires exhaustion of these private financing possibilities and the damage this may cause to near-defaulting countries may become even worse than the experience of Greece.