The Japanese yen experienced wild volatility on Tuesday as risky assets tumbled early in the day amidst growing fears in the financial markets.
However, these assets – including the Japanese yen crosses - subsequently surged higher despite the fact the Federal Reserve didn’t cut rates, on hopes that the central bank and US Treasury would step in and save the world’s biggest insurer, AIG. Indeed, the DJIA – which holds a strong correlation with forex carry trades – started the day down over 150 points, but rebounded to end the day up 140 points. The impact on the Japanese yen? The low-yielder plunged nearly 1 percent against the US dollar and fell approximately 1.15 percent versus the Canadian dollar and New Zealand dollar. Looking ahead to Wednesday, any sort of news regarding a solution for the solvency issues plaguing AIG will be good for risky assets and bad for the Japanese yen, especially since Morgan Stanley – one of the two remaining large investment banks (the other being Goldman Sachs) – reported Q3 net income losses that were slightly better than forecasts after the market close. [B]In the long-term, though, my fundamental bias for the Japanese yen is bullish, as risk aversion is unlikely to fade completely anytime soon. [/B]
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[B]Check out Daily Fundamentals in its entirety for analysis and outlooks on the US dollar, euro, British pound, Japanese yen, and the commodity dollars.[/B]