After the sharp recovery on Friday, it was hardly surprising to see the Japanese Yen crosses rally today. The rebound has been mild for the most part as many currency pairs fail to recapture Thursday?s breakdown point. The first test of whether these rallies will continue will be in Asia.
It took some time Sunday night for the Nikkei to respond to the recovery in the Dow on Thursday and even then the Japanese stock market ended much lower than its intraday high. This type of price action suggests that Japanese traders, like many US traders don?t believe that the worst is behind us but they are relieved that central banks continue be actively trying to help normalize the markets. The Bank of Japan added one trillion yen to its short term money markets today. The continual liquidity injections by the Japanese clearly indicate that they will not be hiking interest rates later this week. Furthermore the recent strength of the Japanese Yen is also doing its part with regards to tightening the economy. In the meantime, the Yen crosses are driven less by interest rate expectations for Japan and more by the market?s overall risk appetite.
[B]Written by Kathy Lien, Chief Currency Strategist[/B]