ECB Trichet: Concern is Not the Same as Brutal (page 2 of 2)

This is not the first time that USD/JPY has traded on the 101 handle without BoJ intervention. Back in late 2004, early 2005, USD/JPY hit a low of 101.70 and the BoJ did nothing, The main reason why the BoJ has not intervened over the past few years is because they want to lead by example and encourage China to make their exchange rate more flexible. If they intervene, it would set back all of their efforts. However intervention from Japan is still more likely than intervention from the Eurozone because Japanese corporations are beginning to suffer. The most recent Tankan survey showed that most Japanese corporations forecast the value of USDJPY in 2008 to be around 113.00. With the pair now rapidly approaching the 100 level, those hedges are deep in the red. However if they were to intervene, now would be a good time because positioning in the Japanese Yen is at an extreme, giving them the most bang for their buck. Yen long positions are at the highest levels since Feb 2004, right before the last BoJ intervention. USD/JPY short traders need to be particularly wary about intervention risk at this time.

Australian, New Zealand and Canadian Dollars Continue to Plummet

The Australian and New Zealand dollars continued to plummet as the Dow dropped another 150 points to a 6 week low. There was no data released from either country and gold prices continued to fall which means that risk aversion is the primary driver. The same can be said of the Canadian dollar because it also fell significantly despite stronger housing starts and another record high in oil futures. The Canadian trade balance and the new housing price index are due for release tomorrow. We expect both of these numbers to be CAD positive but it remains to be seen whether that will have a lasting impact on the Canadian dollar.

British Pound Weakens Against Euro and US Dollar

The British pound gave back its earlier gains against both the Euro and US dollar. Economic data was mixed with the annualized pace of output prices increasing less than expected but input prices increasing more than expected. Industrial production fell short of expectations as well, but manufacturing production rose in the month of January.