Forex market volatility spiked sharply higher during the Asian session on Thursday as the Nikkei index registered a daily decline of over 7%. Japanese equities were unsettled by a further disorderly rise in government bond yields, which forced Bank of Japan intervention to help stabilise the condition. There was a significant flight to quality and increase in demand for defensive currencies, especially in view of weak Chinese PMI data. There was uncertainty surrounding the US monetary policy trajectory, which exacerbated the deterioration in risk appetite.
The dollar initially dipped through 102 against the yen and stop-loss yen buying helped accelerate the decline with a low just below 101 early in the European session. There was also substantial damage on the yen crosses as the Euro retreated to near 130 and Sterling dipped below 152. Commodity currencies were sucked into the sell-off as the Canadian dollar dipped to 2013 low. The Australian dollar was also subjected to further heavy selling as it weakened to below the 0.96 level against the US currency for the first time since June 2012.
There was some relief surrounding the latest Euro-zone data, although the underlying picture remained extremely fragile. There was a recovery in the latest flash PMI manufacturing index to 47.8 from 46.7 and there was also a small improvement in the services sector. With the data continuing to suggest economic contraction, there was still pressure for more policy support from the ECB.
The UK data caused less of an impact than in the previous two days with the second estimate of first-quarter GDP unrevised at 0.3%. There was some disappointment over the data components with fragile consumer spending and a decline in both investment and exports pointing to underlying vulnerability. Sterling was broadly unfazed by the data as it held above the 1.50 level against the dollar.
The latest US economic data releases were slightly stronger than expected with jobless clams falling to 340,000 in the latest week from a revised 363,000 while there were monthly gains in house prices. Confidence was also boosted by a steady reading for the latest PMI index at just above the pivotal 50 level and a rise in new home sales.
The data releases had a significant impact in calming market nerves as equity markets recovered from their worst levels. There were comments from Regional Fed President Bullard, which broadly supported Bernanke’s take on policy from Wednesday and did not have a major impact. EUR/USD found support in the 1.2820 area and rallied back to the 1.29 region as markets again were unable to keep the pair below 1.2850. The yen retreated from its best levels as commodity currencies also rallied.