Market Reflections

Reactions to the Japanese earthquake last week have been fairly predictable so far in the financial markets – equities have sold off sharply with shares in uranium miners falling, while natural gas futures and oil have risen.  Insurance stocks have also suffered but Japanese builders have gained.  For forex traders the picture is still unclear as this risk aversion in equities has, so far, not translated into any meaningful US dollar strength. Indeed, the dollar index continues to fall and trade in the 76 region and is now perilously close to last November’s low of 75.63.  This level is also key because should prices hold then we could see the formation of a strong double bottom pattern on the weekly chart and perhaps the start of a renaissance for the US dollar.

For the Yen, many traders are looking to the earthquake that destroyed Kobe in 1995 where it was a case of short the dollar yen and expect a bumpy ride.  However, the Kobe earthquake was in January whereas the present disaster has happened just before the end of Japan’s fiscal year which normally means the repatriation of profits earned overseas.  These overseas earnings must be converted back into Yen, as exporting manufacturers top up their profits in Tokyo, and such flows have usually resulted in a boost to the Yen.   However, to these flows must be added the cost of rebuilding after this present disaster which, according to experts, the cost of rebuilding is likely to require the sale of some $1.25 trillion in offshore assets adding further  upwards pressure on the currency.   However, the BOJ has already stepped into the market and indicated that it will do whatever is necessary to rein in the strength of its currency.

At the moment currency markets cannot make up their minds whether to trade the yen on the back of further BOJ stimulus, implying a weaker Yen, or as a safe haven implying a stronger yen.  In the short term the result of this indecision will be much greater volatility but medium term the bias is likely to be a weaker Yen given the BOJ’s determination to protect the Japanese export market as the country endeavours to recover from the catastrophic events of the past week.

 

 

 

About Anna 1007 Articles
Hi – my name is Anna Coulling and I am a full time currency, commodities and equities trader. I have been involved in both trading and investing for over fifteen years and have traded many different financial instruments, from options and futures to stocks and commodities. I write and publish articles ( mostly for free ) for UK and international publications on a wide variety of financial issues, and in particular I enjoy helping others learn how to invest and trade.

2 Comments on Market Reflections

  1. Hi
    This my first currency trade.

    Once again I’m a little confused and require your much appreciated assistance.

    I have bought audjpy @ $82.50
    As it rises to say $83.00 I am making profit. Does this mean that the yen is weakening against the aud? There is talk after the current events that the yen will fall. But on Friday it dropped to $82.00
    so my question is if the yen does weaken will the trade go towards the $90 or towards the $70 marks?and which currency have I borrowed.
    I am trying to make an educated decision on wether to hold or close the trade.  

    Thanks in advance
    Adrian

    Adrian

    • Hi Adrian

      Many thanks for your comments & I will do my best to clarify this for you. If you go long aud/jpy at 82.50 you are buying the Aussie & selling Yen. You are taking the view that the Aussie is strong and the Yen is weak. Following the earthquake many novice traders have assumed (wrongly) that the Yen would suffer & weaken. However, the opposite has happened for the reasons outlined in my post. Furthermore, the aud jpy is a “risk on” and carry trade currency pair & correlates strongly with equities and it will continue to fall until such time as markets stabilise and/or the BOJ steps in to prevent the Yen from strengthening any further. If your trade goes to 90 then the Yen has indeed weakened & you will be in profit. If the pair move towards 70 then your trade will be in loss, as the Yen continues to strengthen.

      As to whether to hold or close your trade I hope you have attached a stop loss to your trade which would trigger your exit and remove this decision from you. However, if this is not the case only you can decide the extent of any loss you are willing to suffer. For future trades can I please urge you not to enter any trade without a stop loss.

      If you are still undecided I can only suggest you keep a close eye on the daily aud jpy chart to see where the pair may find some support. At time of writing the pair is trading at 80.36 with the price action on the daily chart close to the 200 day moving average.

      Hope the above helps & good luck.
      Regards.
      Anna

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