Japan Unemployment Rate Unexpectedly Rises, Prices Fall Further

Japan’s unemployment rate unexpectedly increased in April and the decline in consumer prices deepened, signaling that domestic demand is restraining the nation’s recovery from its deepest postwar recession.

The jobless rate rose to 5.1 percent from 5 percent, the statistics bureau said today in Tokyo. The median forecast of 23 economists surveyed by Bloomberg News was for no change. Prices excluding fresh food slid 1.5 percent from a year earlier after dropping 1.2 percent in March.

The reports come a day after government figures showed a sustained rebound in exports, driven by demand from Asia’s emerging economies, and highlight Japan’s reliance on trade to sustain growth. The export revival hasn’t been strong enough to spur hiring that would in turn boost household spending, which unexpectedly fell in April, today’s data showed.

“It’ll probably take until next fiscal year for companies to step up hiring,” Noriaki Matsuoka, an economist at Daiwa Asset Management Co. in Tokyo, said before the reports.

The Nikkei 225 Stock Average has tumbled 12 percent this month on concern that the European sovereign debt woes may derail the global recovery. It rose 1.5 percent at 9:08 a.m. in Tokyo as China’s commitment to investing in Europe allayed concern the crisis will worsen. The yen traded at 90.99 per dollar from 90.98 before the reports.

Household spending dropped 0.7 percent in April from a year earlier, the bureau said. The median estimate of economists surveyed was for a 2.5 percent increase. Retail sales rose 4.9 percent from a year earlier, led by gas stations and auto showrooms.
By Aki Ito Bloomberg

Concerns Go Away, Euro Goes Up

The euro advanced today against the U.S. dollar, erasing the yesterday’s decline, and rose versus the Great Britain pound and the Japanese yen after China confirmed its intentions to invest in Europe, damping the risk aversion sentiment and aiding the currencies tied to growth.
China’s State Administration of Foreign Exchange said on its website today: “Europe has been, and will be, one of the major markets for investing China’s exchange reserves”. This announcement eased the concerns that the bigger investors will turn away from the European currency. Not everybody thought that the depreciation was a bad thing, though, as it can help the European economy, making the exports from European and the vacations in Europe cheaper.
The analysts say that the euro is becoming the funding currency. The currency tested the support level twice and traders are now expecting where the resistance level lays. It can be pretty high as EU’s currency is considerer heavily oversold.
EUR/USD traded near 1.2381 today as of 18:55 GMT after it opened at 1.2172. EUR/GBP traded at 0.8485 after opening at 0.8460. EUR/JPY rose to 112.53.

Reasons To Expect A Forex Blowout

Market mechanics have historically worked in a fashion that at the end of a trend, or at a reversal swing point, a surge of momentum and an increase in volume hits the market. These blow-out tops or bottoms create a lot of volatility as old price points get re-tested, and sentiment accepts or rejects the reasons for creating a new trend. It seems as though a blow-out may be on its way.
Recent trade may have completed the consolidation phase, where forex pairs have set solid looking 4-hour channels to sell resistance and buy support, at least until such time that institutional volume increases and drives price action at a sustainable pace. The previous session highs and lows really are the focus of trader attention, and are creating reversal plays that seem to be reliable.
The latest session of global risk trade, for whatever reason is not important, saw equity markets initially hold support and then attract buyers, albeit in small numbers.  The forex valuation frame-work that  is in place at the moment hinges around global risk and equity markets holding 9500 on the Japanese Nikkei, 5700 on the German Dax, and 1035 on the S/P, as institutional interest is forced to play out the inverse Equity/Usd daily correlation in the quest for forex fair value.
There seem to be many reasons for the main components of the dollar index- Eur, Gbp, Aud, Chf, Cad, Jpy- to be sold in the near-term, not least of which is the shadow of fiscal imbalances in some regions. Add in the lower global growth story, and the lower demand for commodities- which are priced in Usd denominations- and the reasons start to multiply.
That is why the 86.00 area looks to be a solid support base that may struggle to get broken, just so long as global investor attention stays away from the $13 Trillion debt mountain that just broke a new U.S. economic record overnight.
The last week of May looks to be drawing in institutional interest to balance books and possibly snap up month-end positions that look relatively inexpensive compared to just two weeks ago. How long that investor appetite can last is another question, but so long as equity markets are holding 9500 on the Japanese Nikkei, 5700 on the German Dax, and 1035 on the S/P the inverse Equity/Usd daily correlation will remain.
Crude oil trade was sent lower in May trade, as global growth questions, and the impact of the Gulf of Mexico oil spill were absorbed. The test of $65 a barrel support looks to have formed a solid area to work higher from. The long break of $70 looked fairly easily, but was probably made so by the fact that crude oil is dramatically oversold.
The need to hedge the long-Usd environment allowed gold trade to move higher and stake a claim to be a stand-alone asset class that seems to have few peers when global expansion is in doubt. The GLD/USD correlation is holding strong as both Usd and Bullion reserves are seen as a near-term safe haven.

Mexican Peso Drops with Oil Prices & Higher Unemployment

The Mexican peso weakened today as the debt crisis threats to spread across the Europe, curbing the commodity prices, and on the increasing unemployment rate.
Crude oil, the biggest source of the export income, forming about a third of the country’s budget, dropped 4.4 percent before settling at $68.75 per barrel today in New York. The unemployment rate climbed to 5.4 percent in April from 4.8 percent in March, while the analysts expected the lower unemployment.
USD/MXN traded today at 12.9879 as of 9:45 GMT up from the opening level of 12.9864.

US Dollar Forecast Remains Bullish Amidst Large S&P 500 Declines

The US Dollar finished the week considerably higher against all except the Euro and Japanese Yen, fueled by a 4+ percent decline in the S&P 500 and broader financial market risk aversion. US stocks briefly saw themselves below last week’s “flash crash” lows as major indices saw their biggest single-day decline since April, 2009. A sharp rebound into Friday’s close suggests that bulls still have some fight left in them, but the S&P 500 Volatility Index (VIX) remains at impressive heights and emphasizes fear surrounding major financial markets.

Whether or not the US Dollar can continue higher against major counterparts will almost certainly depend on the trajectory of the S&P 500 and other financial market risk barometers. An effectively empty week of US economic event risk tells us that the Greenback will almost exclusively take its cues from other markets. To that effect, it may be especially important to watch whether Sunday-to-Monday’s sessions and whether they set the tone for the subsequent days of price action.

The S&P and Dow Jones Industrials Average started the past week sharply lower but recovered noticeably into Monday’s session close. Yet even at this early stage we saw key indicators such as the VIX and the Treasury-Eurodollar (TED) interest rate spread climb to fresh multi-month highs, emphasizing growing tensions below the surface. The steady climb in risk premiums show that credit markets are once again growing risk averse and greatly favoring the security of Government debt. 

 

Three-month LIBOR rates now stand 35bp above the equivalent Treasury security—the largest difference since June, 2009. It serves to note that the credit crisis of 2008 saw the TED spread balloon to a massive 480bps and the more recent premium pales in comparison. Yet recent trends show a steady deterioration in market confidence, and we cannot rule out further flare-ups in market tensions. 

 

Traders should watch market reactions to the coming week’s Conference Board Consumer Confidence results, Durable Goods Orders data, and revisions to US Gross Domestic Product figures. It is difficult to handicap the notoriously volatile Consumer Confidence and Durable Goods Orders releases, while GDP revisions are widely expected to show that the US economy grew slightly more than previously reported through the first quarter of the year. Positive surprises in said releases could arguably improve fundamental outlook for the US economy and calm financial market nerves. Yet it is difficult to imagine that financial markets will suddenly embrace risk and conditions will dramatically improve on a string of economic releases. In the absence of a substantive improvement in key risk barometers, the US Dollar may continue to gain against the highly risk-sensitive commodity currency bloc and other key counterparts.

Euro Rebounds from 4-year Lows

The euro managed to recoup its losses from early Monday trading, rebounding off its lowest level in 4-years beneath the 1.23-level as the European and US equity bourses stabilized. Crude oil also recouped above the $70-per barrel mark. US equities closed the session flat with the Dow Jones down by over 2% around noon to finish nearly unchanged.

The US economic reports released earlier today included the NY Fed manufacturing index, the March net long-term TIC flows and the May NAHB housing market index. The NY Fed manufacturing index fell by more than expected to 19.11 versus forecasts for a 30-reading from 31.86 in April. The March net long-term TIC flows were sharply higher at $140.5 billion, compared with a $47.1 billion print in the prior month.

Traders will look ahead to Tuesday’s reports, consisting of the April producer price index, housing starts and building permits. Consensus estimates are calling for housing starts to improve to 650k units in April from 626k units from March and for building permits to remain unchanged at 680k units. The headline producer price index is forecast to creep up by 0.1% on a monthly basis versus 0.7% and higher by 5.6% on an annualized basis compared with 6.0% previously. The core PPI figures are seen unchanged at 0.1% m/m and 0.9% y/y.
by Korman Tam

Dollar Extends Gains vs Euro on Germany Curbs

The dollar extended its gains against the euro Tuesday on persistent concerns deep government spending cuts in Europe will stifle growth and after Germany said it plans to ban naked short-selling.

AP

The euro fell as low as $1.2255 after the German announcement, still slightly above a four-year low of $1.2234 set on electronic trading platform EBS Monday.

The German government plans to ban naked short-selling from midnight in the country's 10 most important financial institutions, a spokesman for the Finance Ministry said Tuesday in Berlin. The ban will also apply to credit default swaps (CDS) on euro government bonds as well as euro government bonds.

"It tends to suggest desperation on the part of the German officials who want to discourage what they consider speculative attacks on euro-zone financial markets," said Michael Malpede, analyst at Easy Forex in Chicago. "The mood is very bearish, but I still think we're due for a correction, as the market is heavily oversold."

Commodities Pull Back Late in Day as Euro Retreats

NEW YORK - A late retreat in the euro Tuesday dented a rebound in commodities prices.

Most metals settled higher for the day but off their peak levels. Gains in energy and most grain contracts were wiped out.

The back-and-forth trading came a day after commodities were hammered as the euro fell to a four-year low. That pushed the dollar higher, which is a negative for commodities prices.

"Even though the euro is down a few ticks, a lot of fear is already factored" into commodities prices, said Adam Klopfenstein, a senior market strategist at Lind-Waldock.

Analysts say volatility in the euro has been the primary driver of commodities trading in recent weeks, and they expect the trend to continue. The euro is still moving erratically, and mainly lower, as traders assess an ongoing effort to resolve Greece's debt crisis with emergency loans.

Many question whether Europe's economy can still grow as countries enact cost-cutting measures in order to contain a crisis of confidence in European government debt stemming from Greece's situation.

The dollar has strengthened as a result of the drop in the euro, which hurt commodity prices the past couple of weeks. Commodities are priced in dollars, so they become more expensive when the dollar rises.

Gold has been the notable exception to the recent drop in commodities. Investors have been pouring money into gold because it is considered a safe-haven investment and an alternative to holding currencies.

Gold slid in morning trading when the euro was stronger, and started to move higher as the euro fell. June gold fell $13.50 to settle at $1,214.60 an ounce. It fell as low as $1,206.60 in morning trading at about the time the euro rose to its highest level of the day.

Copper, which fell below $3 a pound Monday for the first time since February, jumped by more than 3 percent Tuesday. Copper for July delivery rose 9.9 cents to settle at $3.031 a pound, having traded as high as $3.069 a pound.

Silver also closed higher, but off its intraday high. July silver rose 2 cents to settle at $18.879 an ounce.

While most metals were able to hold onto some of their gains, energy contracts could not.

Benchmark crude for June delivery fell 54 cents to settle at $69.41 a barrel on the New York Mercantile Exchange, the lowest settlement since Dec. 14.

Crude fell below $70 a barrel for the first time since February on Monday and is down nearly 20 percent from an 18-month high reached just two weeks ago.

In other June energy contracts, heating oil fell 2.37 cents to settle at $1.9615 a gallon. Gasoline settled unchanged at $2.0431 a gallon. Natural gas gave up 5.6 cents to settle at $4.342 per 1,000 cubic feet.

Grain and beans also mostly retreated. July wheat fell 1.25 cents to $4.6775 a bushel, while soybeans dropped 1.5 cents to $9.395 a bushel. Corn stayed positive, rising 3.375 cents to $3.5975 a bushel.

-TheAssociated Press

Euro Drops Below 14-month Low Set Before Bailout on Signs Growth to Slump

The euro headed for a fourth weekly decline, breaking through the 14-month low reached against the dollar last week, on concern European nations’ debt-cutting measures will undermine economic growth.
The 16-nation currency touched the least in a week versus the yen before Greece submits a progress report tomorrow to the European Commission on the implementation of a deficit-reduction plan. The yen gained versus all 16 of its major counterparts as Asian stocks and commodities fell, boosting demand for Japan’s currency as a refuge.
“The roots of the debt crisis in Europe have yet to be solved,” said Yoh Nihei, a Tokyo-based trading group manager at Tokai Tokyo Securities Co. “People have reservations about the effectiveness of the loan package. I remain negative on the euro from a long-term perspective.”
The euro was at $1.2527 as of 10:08 a.m. in Tokyo from $1.2535 in New York yesterday, after touching $1.2516, the lowest level since March 5, 2009. Europe’s currency traded at 116.16 yen from 116.27 yen. It earlier touched 115.88 yen, the lowest since May 7. The yen was at 92.70 per dollar from 92.75.
The Nikkei 225 Stock Average fell 1.9 percent and the MSCI Asia Pacific Index of regional shares slipped 1.2 percent. The Reuters/Jeffries CRB Index of 19 raw materials declined 0.4 percent yesterday.
Unprecedented Loan Package
Europe’s currency has fallen 1.8 percent this week after the region’s policy makers unveiled an unprecedented loan package worth almost $1 trillion to combat the sovereign-debt crisis that’s threatening the currency. European Central Bank governing council member Guy Quaden said yesterday the situation facing Greece is worse than in other European nations.
Greece has announced three rounds of deficit-reduction measures this year, including increases in sales tax and levies on fuel, alcohol and tobacco. It last week agreed to a new package including wage and pension cuts to qualify for 110 billion euros ($138 billion) in emergency loans from the EU and the International Monetary Fund.
“Investors are still concerned widespread fiscal tightening could derail the already weak European economic recovery,” said Mike Jones, a currency strategist at Bank of New Zealand Ltd. in Wellington. “A test of the euro’s 2008 low of $1.2330 looks likely in coming sessions.”
Portugal, Spain
Portugal lowered its budget-deficit goal for 2011 to 4.6 percent and approved tax increases and spending cuts. The government maintained a 7.3 percent deficit target for 2010. Last year’s deficit was 9.4 percent of gross domestic product.
Spain this week announced plans to reduce the deficit to 6 percent of GDP in 2011 from 11.2 percent last year, the largest two-year cut since at least 1980. Trade union UGT will stage a one-day strike of public sector workers in June, Candido Mendez, general secretary of the union, said in Madrid yesterday.
“The euro grinds lower on continued pessimism regarding peripheral euro-zone countries,” analysts led by Marc Chandler, New York-based global head of currency strategy at Brown Brothers Harriman & Co., wrote in a research note dated today. “We remain negative on the euro.”
The euro has lost 8.5 percent this year, according to Bloomberg Correlation-Weighted Indexes. The dollar has gained 6.1 percent, and the yen has advanced 6.6 percent.
The dollar was poised to snap two weeks of declines against the yen before U.S. reports that may show retail sales rose for a seventh month and confidence among consumers improved in April, adding to signs the world’s largest economy is recovering.
U.S. Economy
Sales at U.S. retailers increased 0.2 percent in April, extending the most successive gains since 1999, according to a Bloomberg News survey of economists before the Commerce Department report today. The Reuters/University of Michigan preliminary index of consumer sentiment advanced to 73.5 in May from 72.2 in April, another Bloomberg survey showed before the report is released today.
“The outlook for the U.S. economy appears upbeat,” said Akane Vallery Uchida, a currency strategist at Royal Bank of Scotland Group Plc in Tokyo. “This will probably be a positive factor for the greenback.”
Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said yesterday the pledge to keep interest rates low for an “extended period” doesn’t stop the central bank from raising rates “if economic conditions change appropriately, whether that’s in three weeks, three months or three years.”

USD Gains As Investor Sentiment Evaporates

The regional European markets plunged throughout the session, with the major indexes falling as much as 3%, while the currency market pushed towards new yearly lows. All this has been caused by a market that is constantly looking to shed risk and buy assets seen as safe, such as U.S. Treasuries and the U.S. dollar.
The currency market has really only had one trading direction since the beginning of December and that is USD long/everything else short.
Problems in the Euro-area are a major destabilization factor for the global economy and this is currently being priced in by financial markets. If things turn out to be much worse in the Euro-area the global economy will probably experienced a double dip recession, and that is what is being priced in right now.

Various rumors are spreading throughout Europe, which eventually could lead to a deterioration of current situation. To counter this, the chances are that key politicians will organize press meetings, which eventually will led to sudden moves in the currency market. Traders should expect to see gaps at the Sunday open.

As Gold Soars, Is It Too Late to Cash In on the Rally?

Fears that the past weekend’s $1 trillion European rescue package will ultimately drive inflation resulted in investors piling back into gold.

Much of that demand is reportedly coming from Germany, where the memory of hyperinflation between the two world wars continues to significantly influence thinking.

The price of gold is at an all-time high, with demand at its highest level since the collapse of Lehman Brothers.

UBS said demand for gold coins is so high that supply is struggling to match demand and gold producers are ramping up production of coins to cash in on fears over rising inflation.

Gold is currently benefiting from the belief that central banks cannot raise rates, said Monica Fan, senior currency product engineer at State Street Global Advisors.

“Politically it would be very unpalatable to raise rates raising fears over inflation," Fan said. "With so much uncertainty out there gold has become a de-facto currency.”

Current DateTime: 10:12:29 12 May 2010
LinksList Documentid: 37100810

Fundamentals for gold remain strong given the rise of the middle class in Asia, and the "long term trend is bullish,” she said.

Stephen Perry, the chairman of The 48 Group Club and a China watcher, agreed that gold is likely to head higher.

“The economics of the world have changed drastically over the last three years," Perry said. "With so much uncertainty unresolved, gold will be a hedge against uncertainty.”

For the next six to nine months, gold could be a better hedge against inflation than traditional inflation hedges like the money markets and property, he added..

In addition to gold, silver will also rise, Chris Zwermann, the global strategist at Zwermann Financial in Frankfurt, said.

“Silver has broken through a key technical level and will make big gains over the next few days,” he said.

But not everyone agrees.

- Watch the video above for the full interview with Chris Zwermann.

There is no risk of inflation, instead concerns should be about deflation, Jochen Wermuth, the managing partner at Wermuth Asset Management told CNBC.

“When this trend becomes apparent gold will fall,” he said.

Investors should buy long-term puts to protect against lower gold prices over the medium term, Aaron Gurwitz, head of global investment strategy at Barclays Wealth, told CNBC.com.

“Prices may go higher from here, but ultimately they will fall and investors need to protect themselves,” Gurwitz said.

Stocks Plunge on Debt Concern

The euro slid to a 14-month low, global stocks tumbled for a third day and Spanish and Italian bond yields surged on concern European leaders aren’t doing enough to stem the region’s debt crisis. Italy’s benchmark equity index plunged 4.3 percent to the lowest since July.
The euro sank to as low as $1.2654, while the MSCI World Index of 23 developed nations lost 1.5 percent at 12:25 p.m. in New York to extend its three-day slide to 5.2 percent, the biggest in more than a year. The Stoxx Europe 600 Index plunged 1.5 percent and the Standard & Poor’s 500 Index dropped 0.8 percent to an almost two-month low. Ten-year bond yields soared at least 0.22 percentage points in Spain and Italy and investors demanded 1.63 percentage points to own the Spanish debt instead of benchmark German bunds, the most in 13 years.
The European Central Bank held interest rates steady at a record low of 1 percent today and said it didn’t discuss whether to purchase government bonds to stem the region’s debt crisis, defying market speculation that it would take such measures. U.S. stocks and the euro pared losses as Greece’s parliament approved austerity measures demand by the European Union and International Monetary Fund as a condition of its 110 billion ($140 billion) bailout.
“The ECB seems more concerned about cracks to its credibility than cracks to monetary union,” said Christoph Reiger, co-head of fixed-income strategy at Commerzbank AG in Frankfurt. “This approach can be considered consistent with the ECB’s principles. But it risks that the market will still force the ECB’s hand before long.”
2010 Gains Erased
The MSCI Asia Pacific Index today joined the MSCI World Index and the Stoxx 600 Index in erasing its advance for 2010. The S&P 500 is still up 3.7 percent for the year, clinging to gains as better-than-estimated earnings and economic data temper concerns about European debt. The index has slumped 5.1 percent from its high of the year last month.
U.S. benchmark indexes briefly erased losses today as Fed Bank of St. Louis President James B. Bullard said the U.S. labor market is “improving,” while Bernanke said the central bank is working to restore credit to worthy borrowers.
Bank of America Corp., General Electric Co. and Caterpillar Inc. tumbled at least 1.9 percent to lead declines in the Dow Jones Industrial Average as the 30-stock gauge fell below its lowest close since March 22.
Default Swaps Surge
The cost to protect against defaults on U.S. corporate bonds rose to a three-month high. The Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 0.8 basis point to a mid-price of 105.8 basis points, according to Markit Group Ltd.
A 110 billion-euro ($140 billion) aid package to avoid a default by Greece has failed to prevent bond yields from rising, driving up borrowing costs for countries including Spain and Portugal. Sovereign debt contagion may spread across Europe, affecting the banking systems of Portugal, Spain and Italy, as well as Greece, Moody’s Investors Service said in a report.
“It’s all about Europe,” said Tom Wirth, senior investment officer for Chemung Canal Trust Co., which manages $1.6 billion in Elmira, New York. “There’s a perception that what’s going on in Europe will be dragging the region back into a recession. The question is how much of that is going to be contagious to the rest of the world.”

S/P- 65% Off Yearly Highs. Global Markets Now In The Red YTD

Asian and European equity index have given back all of 2010 gains in the Tuesday sell-off, while the S/P has a taken a 65% reduction in its year-to-date gains, that were shed in three sessions of trade. In all, it goes to show how unstable the stair-step moves higher on very low volume in 2010 were, and how dangerous those lightweight moves are when support areas need to be tested.
We stated in April that forex charts had the look and feel of the sub-prime and credit crisis era. The increasing volatility in the 'one-day-up and one-day-down' moves that made and lost a year’s worth of gains in quick time are confirming a lack of leverage, lack of access to inter-bank margin, and more importantly maybe, a need now to find yield returns outside of equity markets.
Investors are absorbing the ultimate in stair-step up/elevator down moves that have wiped out equity index stop loss areas that now will take time to reset. The impact in forex trade has been to see Usd strength across the board as trade desks get long dollar-based Treasury notes, and liquidate long-equity positions. The move to Treasury notes pays out an average 3% a year, a humble amount, but none the less obviously an attractive enough return for investors to liquidate stocks, and run for the safety of Usd notes.
The Wall Street rally on Monday, that added nearly 2% after Warren Buffet talked up his investment in Goldman Sachs, has been wiped out in quick time on Tuesday. However, the initial overnight moves lower in Asian and European trade looked no different to any other day that traders have seen in all of April. The variable on Tuesday seemed to be that certain price points were taken in the European banking sector that obviously were set on low volume on the way up.
The main European banks dropped an average of 5% today, and were instrumental in triggering a slow and steady market-wide sell-off that allowed no chance of the typical relief rally to form. The increasing volume in getting out of positions, compared to the volume as trades were built over the last four months, was dramatic, and shows once again the danger of going higher on light volume.
Euro-zone fiscal worries have built to the degree that they now seem to rival the infamous Bear Stearns, Lehman Bros, Credit Crisis, and Dubai World headlines that created doubts in regard to the safety of each one’s ability to pull through. Some survived, and some did not, but there is no getting away from the fact that this current period of trade has a similar profile.
The question marks now hanging over fiscal policies overseas have allowed the Usd to gain an average 1% in Tuesday trade, but important to note is the fact that only one of the major pairs was able to break past support 2 or resistance 2 on the daily swing points. That much of a dollar index percentage gain would normally see the majority of pairs testing support or resistance 3 price points. That signals that a near-term reversal of Usd buying may happen ahead of the Asian session.
Whether this latest equity move will be as contagious as its predecessors, or whether the low-volume bulls find a way to once again reverse the reversal is yet to be confirmed. If equities move the S/P index off the current 1165 support, and manage to get anywhere close to 1175 or 1185 in near-term trade, the Usd will very likely be giving back the gains seen against Cad, Aud, Gbp, and will continue its long moves against Jpy, while Eur and Chf remain at the beck and call of sovereign investor sentiment.
Forex traders have seen a move unfold on Tuesday that could easily have been replicated on any given day in April, but unlike previous attempts, the perfect storm of headlines, sound-bites price point, and a surge of well timed volume came together on Tuesday to allow the drop to hold. The Japanese markets return from a five day bank holiday weekend tonight, and that should mix up the volatility even further.

Forex: Eur/Usd At One Year Low, Implied Volatility Turning Downwards

The currency market took a break during the overnight hours, following the strong moves seen lately. Price action during the Asian and the European sessions was relatively flat, with the major pairs retracing a small portion of the ground lost in recent trading. So far into the session, these moves can be seen only as a standard retracement off oversold levels, rather than a change in trend.
Most assets quoted in the financial market are trading in an oversold state due to the recent price action, with the Usd, Gold and Treasuries at the overbought line. These three are bought because they are seen as having very small risks. The U.S. dollar has the advantage of its status as a reserve currency at times of risk aversion, since 61.5% of the global currency reserve is held in the Usd.
The market had been characterized by a strong risk-aversion phase over the last few trading sessions, caused by a possible default in the Euro-zone. If Greece, or any other country, defaults on its debt obligations the global economy could experience a crisis similar to the one seen in 2008 and 2009.
Among the major currencies, the Eur took the biggest hit since it is right in the middle of the problems. The Eur/Usd plunged to one-year low, breaking below the 1.3000 psychological barrier in trade on Tuesday. Looking forward, the outlook of the pair lies to the downside, with a possible target in the 1.2500 area.
Interestingly, the Eur/Usd implied volatility turned to a downward slope, known as volatility skew, rather than the usual volatility smile that characterize the foreign exchange options market. This shows that options traders expect strong moves to the downside, with only limited upside action. For the currency options market, volatility skews are very rare.
The Usd will find even more buyers unless the situation in Europe improves quickly, which is unlikely, but some relief for the Eur and for the other major currencies might come at Thursday’s ECB Press Conference.