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Currency Watch: Forex Shows Overnight Volatility

The yen enjoys a pop on positive news and comments from the Bank of Japan and Ministry of Finance.
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The forex markets have shown volatility overnight, with dollar/yen making an unexpected move, dropping by 1.5 yen. The factors behind the yen's pop were some new data and comments out of Japan.

The

Bank of Japan

monthly report indicated that the improvement in the economy was becoming clearer. In addition, BOJ Governor

Masaru Hayami

suggested that the zero-interest-rate policy might come to an end soon. Further motivation to buy yen was generated by a strong performance by the

Nikkei

, which rose 1.5% today.

These solid economic data support the evidence that the BOJ is no longer so concerned about the impact of a strong yen on its growth strategy. In recent days, Japanese spokesmen have minimized the need for the

G7

to address the issue. Yesterday, a Japanese Finance Ministry official

Haruhiko Kuroda

said that foreign exchange would not be a major topic at the Washington meetings.

Traders quickly point out the apparent conflicts in the signals presently coming out of Japan. Hayami's comments suggest no attempt to discourage yen bulls and the market immediately reacted to buy the currency. On the other hand, the

Ministry of Finance

has long waged a war to prevent the yen from continually pushing higher and has spent billions in forex intervention to try to achieve this aim. Perhaps evidence of solid economic growth is causing some loss of commitment to the Ministry's strategy.

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"Little bit of a confusing statement and that set off the fireworks," said Scott Schultz at

Brown Brothers Harriman

. "Yesterday the talk was all about

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selling yards of yen and there was only a 30-point range in New York. Today after the statement, we go through stop-losses and the market is quite beat up." Schultz sees dollar/yen a little lower as the day goes on.

Dollar/yen was opening at 105.60, compared with yesterday's closing at 107.00. The euro/yen cross has moved in favor of the yen and lately stood at 101.10, far below yesterday's level of 102.60.

At the opening in New York, the euro was fractionally weaker at $0.9570. Belgian Finance Minister

Didier Reynders

said the eurozone was not looking for a supportive statement from the G7 meeting. Talk of a

European Central Bank

rate increase on Thursday has been muted but not entirely suppressed.

Sterling has been steady at $1.5850. Traders feel that increasing signs of a period of slower economic growth for the U.K. economy are reducing pressure on the

Bank of England

to push interest rates higher. A spokesman for Prime Minister

Tony Blair

said once again the U.K. does not see a short-term devaluation of the pound as a viable strategy even in the face of loss of manufacturing export markets.

The dollar/Swiss franc has given back recent gains and was trading at SF1.6455 compared with SF1.6400 at the close. Euro/Swiss was little changed at SF1.5750.

The

Norwegian Central Bank

has raised domestic interest rates by 25 basis points to 5.75%.

The dollar was again largely unchanged at C$1.4655, with no new information expected until later in the week. According to traders, the $C is virtually dormant, with speculative players unwilling to risk any serious capital.

The Australian dollar made no new lows overnight and continued to trade around $0.5955. In general, traders believe that the Aussie is exposed to further selling pressure but there is some sense that the worst may be over for the time being. A further negative economic item was the fall of 3.7% in consumer confidence reported by the

Westpac-Melbourne Institute

.