Continued weakness in the Dow has led to continued weakness in the Japanese Yen crosses. Last night, the Nikkei tracked US equities lower driving carry trades to 10-day lows. These losses were recovered when the Dow opened up 60 points, but the sharp intraday reversal in US stocks triggered another wave of selling.
Risk aversion is certainly part of the problem, but part of the move may also be due to the expectation that the G7 could institute tougher language towards the Japanese Yen and the Chinese Yuan. Recent comments from Eurozone and US officials seem to indicate that the Yen will become the scapegoat for dollar weakness and Euro strength. For the Europeans, getting the Yuan and Yen to strengthen would at least help to lower the value of EUR/JPY. In the meantime, it is important to remember that the weakness of the Japanese Yen will continue to bring benefits to Japan’s economy. The tertiary activity index was stronger than expected in the month of August.
Written by Kathy Lien, Chief Currency Strategist for DailyFX.com