Despite a blockbuster German Prelim GDP q/q the Euro has continued its decline against the dollar. Figures show the German economy grew by 2.2% in the 2nd quarter, with the previous quarter revised higher from 0.2% to 0.5%. Germany is the Eurozone’s main driver of growth and the recent weakness of the Euro has ensured their exports enjoyed a period of improved competitiveness.
The Euro was unable to halt its 5 previous days of losses as soft GDP figures from Spain and Greece off-set the Germany’s exceptional rate of growth. Disappointing GDP figures from the peripheral European nations has once again re-ignited concerns over the recovery in Europe.
Meanwhile USD/JPY has regained the 86.00 handle on speculation that the BoJ may consider intervention in a bid to weaken the Yen after setting 15-year low earlier this week. There are growing concerns out of Japan that the currency’s recent strength may threaten to derail their export led recovery.
The topic of intervention raises a few questions, one of them being: what is the likelihood that the BoJ will choose to pursue this option, and secondly, whether or not the option of intervention would provide a sustainable solution? The BoJ have not actively intervened in the currency markets since 2004 when they spent 35 trillion Yen to weaken the currency when the economy was suffering from severe deflation. Similarly in 1995 the Yen was weakened from its post war high by co-ordinated intervention, a move from 79.00 to 100.00 was the direct result. The problem is that currently both Europe and the U.S are in the process of reviving their own economies, and therefore a stronger home currency is not in the interest of recovery. With this in mind the chances of a co-ordinated intervention are reduced. Without the support and co-ordination of global central banks any form of intervention may prove to be short lived.
We feel the longer term fundamental drivers remain intact for a rally in USD/JPY, but the pair look set for a bumpy ride in the short-term as the U.S battle to keep their recovery on track. However, an intervention by the BoJ alone would offer some support to the pair, especially if they can carry the pair through key resistance at 88.30. This would ensure traders exit shorts, and possibly use the key level as a platform to buy. But a sustained move back towards 100.00 and above will be a result of a drastic improvement in the U.S economy, or as we mentioned earlier from the support of co-ordinated intervention. This pair continues to offer substantial upside potential, but a discretionary approach to managing this view is vital in order to make this a profitable trade.
The Euro was unable to halt its 5 previous days of losses as soft GDP figures from Spain and Greece off-set the Germany’s exceptional rate of growth. Disappointing GDP figures from the peripheral European nations has once again re-ignited concerns over the recovery in Europe.
Meanwhile USD/JPY has regained the 86.00 handle on speculation that the BoJ may consider intervention in a bid to weaken the Yen after setting 15-year low earlier this week. There are growing concerns out of Japan that the currency’s recent strength may threaten to derail their export led recovery.
The topic of intervention raises a few questions, one of them being: what is the likelihood that the BoJ will choose to pursue this option, and secondly, whether or not the option of intervention would provide a sustainable solution? The BoJ have not actively intervened in the currency markets since 2004 when they spent 35 trillion Yen to weaken the currency when the economy was suffering from severe deflation. Similarly in 1995 the Yen was weakened from its post war high by co-ordinated intervention, a move from 79.00 to 100.00 was the direct result. The problem is that currently both Europe and the U.S are in the process of reviving their own economies, and therefore a stronger home currency is not in the interest of recovery. With this in mind the chances of a co-ordinated intervention are reduced. Without the support and co-ordination of global central banks any form of intervention may prove to be short lived.
We feel the longer term fundamental drivers remain intact for a rally in USD/JPY, but the pair look set for a bumpy ride in the short-term as the U.S battle to keep their recovery on track. However, an intervention by the BoJ alone would offer some support to the pair, especially if they can carry the pair through key resistance at 88.30. This would ensure traders exit shorts, and possibly use the key level as a platform to buy. But a sustained move back towards 100.00 and above will be a result of a drastic improvement in the U.S economy, or as we mentioned earlier from the support of co-ordinated intervention. This pair continues to offer substantial upside potential, but a discretionary approach to managing this view is vital in order to make this a profitable trade.
