Fujii's High-Wire Act Has Yen in Demand

09/29/2009 12:01 am EST

Focus: FOREX

Imagine a wise old Japanese acrobat balanced precariously above the circus ring with eyes watching in the event the old man loses his balance. His arms outstretched, he tries to reach one end of the rope before he loses his self trust, forcing him to turn around, only to realize he's equidistant from the other end of the rope. That seems to be the current position for Japanese finance minister, Hirohisa Fujii as he steadfastly walks the currency tightrope. The aging minister finds himself in an awkward spot with a media circus juggling each of his phrases before tossing them over to the lions for sport. The volatility in the Japanese yen accelerates as Mr. Fujii tries to explain and reassert his original vocabulary.

The yen surged in Tokyo trading as more of the same comments were unleashed upon forex traders. Mr. Fujii said he didn't consider the recent movements in the yen as carrying excessive volatility. Readers should interpret this to mean that the yen's surge against the dollar to its strongest price since February was not cause for concern under the new government.

Mr. Fujii is having the hardest time in explaining that he's basically currency ambivalent and cares neither for a weak yen, which helps exporters, nor a stronger yen, which might reflect economic improvements.

Because the currency crowd has heard that it should not expect to see nor hear currency intervention, the sport became one in which traders tried to identify that line in the sand to where they think they can safely push the yen without collapsing the house of cards in this game of dare. The yen's January reading of ¥87.31 is a clear target and marks the firmest yen price since 1995. To that extent, the market has a vested interest in pushing the yen up to see what's on the other side. However, seasoned traders will know that it will likely take a couple of efforts to take out a stack of profit-taking orders first. But over the coming couple of weeks, this will become enjoyable sport for the observer, especially with the legitimate catalyst of a political change arguing for currency realignment.

On Sunday night (USA), the yen beat back all 16 major currency pairs as investors concluded that the yen might be a one-way bet. Some of the yen's gains were later paired back, yet it still remains higher at ¥89.35 to the dollar, ¥131 against the euro.

Against the British pound, the yen rallied to ¥141.95. The pound continues to flounder and fell to 92.40 pennies against the euro. The Chancellor of the Exchequer, Alastair Darling, stated that he would meet with executives at the top four British banks in order to discuss what he called “automatic bonuses.” Despite a rebound in housing data today, the pound is responding largely to the potential for further restrictions and government interference that may harness risk taking and thereby reduce profitability. The pound lost another penny to the dollar today at $1.5884.

Early in the day, weakness in equity markets has reversed course. The stronger yen harmed share prices of domestic exporters despite the fact that these same conglomerates continue to repatriate overseas earnings back into yen. Regional weakness in stock markets soon became the order of the day with many investors likely judging the yen's surge as a sign of increased risk aversion. By the middle of the European day's trading session, stocks had rebounded, setting up for a healthy rally to American markets.

In line with early weakness, the commodity-sensitive currencies eased, but by mid-morning in the US session, the Australian dollar continues its ascent, as does the Canadian dollar.

By Andrew Wilkinson, senior market analyst, www.InteractiveBrokers.com

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