Forex Investment and Currency Trading

Over the last day we’ve seen the USD continue to weaken against most of the majors, as markets continue to adjust to the new near-zero interest rate world in the US. The yen gave back some if its gains though overnight after rumours of Japanese official intervention. In what was described as “15 minutes of madness,” EUR/JPY rose from 127.30 to 131 and USD/JPY shot up from around 88 to 89. This followed comments from Japanese Finance Minister Nakagawa, who said that he is “keenly watching” the currency markets and that he has “the means” to limit the yen’s appreciation. After USD/JPY reached its lowest level in 13 years yesterday, it looks like officials are strengthening their rhetoric, attempting to talk the yen down.

That brings us to tonight’s Bank of Japan interest rate decision. For the first time in ages, the BoJ is going into the meeting with the second-lowest policy rate in the developed world, after the Fed cut its target rate to a range of 0.0% - 0.25% on Tuesday. Although the formal consensus call is for the BoJ to keep its policy rate on hold at 0.30%, this week’s developments have certainly increased the odds that the BoJ decides to cut rates by another 15-20bps. Now that interest rates spreads between Japan and the US have come in sharply, and that USD/JPY has traded below 90 for the last couple of days, the BoJ could choose to cut rates in an attempt to soften the currency, and maybe instil a small amount of confidence in the beleaguered Japanese economy.

Looking at the other majors, EUR/GBP continues to hit new highs, climbing above 0.95 earlier this morning, as markets speculate that the Bank of England could be the next central bank to move to quantitative easing. The BoE’s Bean spoke last night, saying that zero interest rates are a possibility in the UK, which probably helped to fuel that idea. On the other hand, the ECB’s Stark spoke earlier this morning about the eventual need for more restrictive policy in the Eurozone, although the region is
only just now entering the worst of the recession.

This week’s move in the euro has been relentless, and has been described as making the risk aversion sell-off (when EUR/USD lost 8 or 9 big figures in one week) look like a tea party. While we had been expecting to see the US dollar weaken as its fundamentals caught up with it, Tuesday’s move to ZIRP by the FOMC accelerated the process, and we can’t rule out a return to the 1.50-1.60 range for the euro.