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Daily Currency Market Focus

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What's Behind the Big Moves in Currencies?

Thu, Jan 22 2009, 08:17 GMT
by Kathy Lien

GFT

There has been a lot of volatility in the foreign exchange market this morning, driving currencies to historic levels:

• GBP/USD - 26 Year Low
• USD/JPY - 13 Year Low
• NZD/USD - 6 Year Low
• EUR/JPY - 6 Year Low
• CAD/JPY - 13 Year Low
• GBP/JPY - Record Low
• NZD/JPY - 8 Year Low

The most significant moves have been in the British pound, which fell to a 26 year low against the US dollar and in USD/JPY, which fell to the lowest level in 13 years. Comments from former Fed Chairman Volcker triggered a wave of risk aversion that led to a technical break in the currency market. He said "we are in serious recession, with no end clearly in sight." Although there is no question that the US economy is in trouble, by saying that there is no end in sight means that there is no hope which coming from the chairman of Obama's newly formed Economic Recovery Advisory Board is significant. By saying that he does not an end to the recession is certainly not good advice. Treasury Secretary Nominee Geithner expects an Obama economic stimulus plan to be released in the next few weeks but unfortunately Volcker's comments overshadowed the prospect of a stimulus plan. Yesterday's sharp sell-off made investors nervous but Volcker's comments pushed them over the edge.

We are continuing to see flight to safety into the US dollar and Japanese Yen. Investors are looking to hide in the lowest yielding currencies.

Will the Bank of Japan Intervene?

With the Japanese Yen hitting levels not seen against the US dollar in more than a decade, the question hanging over the markets is whether the Bank of Japan will intervene to weaken the Japanese Yen. They have tried verbal intervention and it hasn't worked. Up until now, the Japanese have been reluctant to physically intervene because they may not have support from the US or Europe. However there comes a point when they may have to stop thinking about other people and start thinking about themselves. Japanese corporations like Toyota have suffered greatly from the strength of the Yen and these companies may be exerting pressure on the government to take action. The risk of BoJ intervention is growing and if USD/JPY falls below 85, the BoJ may have to step in.

Intervention by Swiss National Bank?

We also had comments from ECB President Trichet and SNB President Hildebrand. Trichet defended the ECB's monetary policy and said they haven't decided if 2 percent is the lowest level for rates.

The Swiss franc collapsed after Hildebrand said that the central banks is considering selling francs to halt the currency's gains. With interest rates already at 0.5 percent, they have no room to ease monetary policy. Therefore they may have to resort to fixed rate currency intervention but for the time being, we think that they are testing out verbal intervention rather than committing to physical intervention.

Published on  Thu, Jan 22 2009, 08:18 GMT