Japanese yen, nuclear crisis and the G7

by Forex Trading HQ on March 22, 2011

in Forex Special Reports

Japanese yen plummets after G7 intervention

 While the world focuses on Japan’s battle against a serious nuclear crisis, the G7 surprised the markets on Friday after it agreed on a joint intervention to weaken the yen for the first time in 10 years. The G-7 finance ministers agreed to join forces and sell the yen in order to curb the currency‘s rise. Two weeks ago, an 8.9-magnitude quake struck Japan, triggering a tsunami and leaving a trail of destruction and human tragedy. But the worst was yet to come. The tsunami caused severe damages to several nuclear plants, raising fears of a nuclear meltdown. As authorities battle to cool the nuclear reactors, a state of emergency has been declared.

 As risk aversion heightened, the yen strengthened, hitting record high levels against its major counterparts. You might wonder why the yen should rise while the country is struggling to escape a nuclear crisis. The reason is that investors have been buying the yen on speculation that the Japanese will liquidate their assets abroad and repatriate funds for reconstruction. Expectations of funds returning to Japan appear to be the main driver of the yen’s rally. The strong yen has further deepened the country’s economic crisis. Japan is an export-oriented nation and a rise in the yen may stall the world’s third-largest economy. Auto-making companies, such as Toyota, may see their earnings slump as a strong yen hurts their global competitiveness.

 Following the earthquake the yen rallied against its major counterparts. It soared against the US dollar climbing to a postwar high and rose against the euro, the Aussie dollar and the pound. Against the yen, the dollar dipped to 76.73 as the Nikkei marked significant losses. This was enough to alarm the G7 central banks to initiate a yen intervention. The intervention sent the USDJPY to as high as 81.98 that is a 6.8% price change on Friday 18 March. Now that the yen is on the defensive, investors at this stage appear cautious to push it higher as they fear this could lead to a second round of intervention.

 However, analysts argue that the yen will continue to rise as the nuclear threat continues to haunt Japan and there will be a massive demand for reconstruction. Reports say that the G7 intention is not to approach a specific level but to stabilize price movements in the markets. Analysts cite major resistance levels at 84.49 with forecasters maintaining a short view on the pair provided the 84.49 resistance holds. A break above that level may show an upward trend with the next resistance at 85.95.

 Yen volatility against the majors

 What is potentially more interesting is the yen’s volatility against the majors. EURJPY plummeted to 106.65 after the disaster and then jumped to 115.56 after the intervention, creating an 8.4% price change. If the pair breaks through 115.69, analysts expect it to move upwards towards the 120 level. AUDJPY appreciated 9.4%, rising to 81.81 from 74.80. Analysts expect the pair to continue trading higher with resistance level at 82.50. If the pair breaks above the resistance level it is expected to go as high as 83.71. GBPJPY gained 7.8%, edging as high as 132.49 from 122.87. The pair is also expected to move higher with resistance at 133.72; a break above this level could expose the 135.48 resistance level.

 The yen is expected to remain centre stage this week. Investors will be closely watching central banks’ actions and news regarding the nuclear crisis. Whatever happens, it will be an interesting time to trade the currency markets. Be prepared for a volatile and adventurous trading!!!

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