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The type of moves that we have seen in the currency market during the Asian and European trading sessions are typically what we see in a quarter or a half year. USD/JPY has fallen 5 percent, AUD/USD is down more than 8.5 percent while the NZD/USD is down 7 percent. The sell-off in the Japanese Yen crosses are even more severe with AUD/JPY down 13.5 percent and NZD/JPY down 12 percent. Here is a list of the biggest movers as of 9am ET:
Yesterday, I warned against a premature top in the EUR/USD!
Although it may be very tempting to say that the dollar has hit a top, especially against the Euro, in order for this EUR/USD rally to be real and for investors to be convinced to stop selling higher yielding currencies, we need to see stabilization in the financial markets and a return of confidence.
The mentality in the currency and stock markets is sell now, ask questions later. The low yielding US dollar and Japanese Yen continue to be the biggest beneficiaries of risk aversion. The only thing that investors want right now are safe haven plays. The dollar’s strength will force emerging market countries to rush to prevent a flight of capital out of their currencies – more rate hikes could be likely. With deleveraging being the theme of the day, when confidence is lost, it will be difficult to recover.
Where are the Value Points for the Currency Market?
In the Wed edition of my Daily GFT Report and on CNBC and Bloomberg I talked about how the dollar could rise another 5%. At that time, the EUR/USD was trading at 1.2829 and the GBP/USD at 1.6236. The GBP/USD has already hit my 5 percent target and at one point this morning even became undervalued on a purchasing parity basis. Although the UK GDP report confirms that the country is headed for a recession and validates the weakness, I believe that we have seen a near term low in the currency pair.
The EUR/USD on the other hand has only dropped 2.5 percent. The EUR/USD does not become a value play until 1.15-1.20. As for USD/JPY, it has also reached my target of 95. Although I won’t be a buyer at these levels, I won’t be a seller either. There are no rewards for heros in this type of market.
Will the BoJ Intervene?
If you are wondering about Bank of Japan intervention, don’t expect it to happen. As an export dependent nation, a strong currency is not in Japan’s best interest. However unlike in the past where the BoJ has intervened when USD/JPY fell below 105 and 100, we may not see any action by the Japanese government this time around. Since the problems are inherent in the US and the Eurozone, intervening at this time may be counterproductive for the Japanese. The Japanese government needs to stand aside and allow the US and Eurozone governments to take their measures to spur growth and not strengthen the dollar for their own short term relief.
If intervention was on the table, the Japanese PM would not make the following comment this morning:
RISE IN YEN NOT ALWAYS BAD BECAUSE IT PUSHES DOWN OIL PRICES FOR JAPAN”
Risk of Limit Down Day in US Stocks
With S&P futures already trading at limit down this morning, there is a decent chance that circuit breakers may be hit in the first hour of trading. The moves in the Dow Jones Industrial Average these days is strikingly similar to the move in 1906 and 1907 (Here is a chart from Barclays). In the last phase of the sell off between Q2 of 1907 and Q4 of 1908, the Dow dropped 37% before it bottomed out. From the August 11500 levels in the Dow, a 37% move would take the index down to a new 6 year low of 7245.
Click to Enlarge