FX Market Summary 06-11-2013: Yen again leads market instability

Volatility spiked higher once more during Tuesday with the yen again having an important impact in triggering wider market instability.

The Bank of Japan left monetary policy on hold at the latest meeting which had been expected. The central bank, however, also declined the opportunity to make fresh money-market injections or additional measures in order to help stabilise the bond market, with  the bank commenting that volatility has already eased.

The dollar initially weakened to below 98 against the yen following the decision with further selling pressure during the European session as markets reacted negatively to Bank Governor Kuroda’s comments. A cascade of stop-loss yen buying and momentum plays pushed the US currency to lows just below 96.50 ahead of the US open.

Emerging-market currencies were again subjected to selling pressure as the South African rand retreated to beyond 10.30 against the dollar while the Indian rupee hit record lows beyond 59 before being rescued by Reserve Bank intervention.  The combination of weak equity markets and emerging-market growth fears was again an important negative factor for the Australian dollar as it dipped to lows around 0.9325 against the US dollar, the weakest level since October 2010.

The German Constitutional Court convened on Tuesday for a two-day meeting to hear arguments that the ECB’s outright Monetary Transactions (OMT) policy was unconstitutional.  The Euro secured some support from a defence of the OMT programme by ECB officials, but there were still underlying concerns surrounding the threat of widening ECB divisions. Although a rejection of OMT by the Court is not expected, any hint of serious objections could pose a major Euro threat.

Volatile conditions in the US bond market helped trigger sharp currency moves as a decline in yields helped commodity currencies recover ground.  EUR/USD briefly pushed above the 1.33 area, but was unable to sustain the gains and retreated during Bundesbank head Weidmann’s testimony to the Court as he outlined the German central bank’s reservations.

The latest UK industrial production data was close to expectations with manufacturing declining by 0.2% in April following a 1.0% gain the previous month. Sterling did, however, benefit again from being out of the limelight with a positive reading in the latest RICS housing survey also having a beneficial impact on sentiment. After an initial move to 1.56 against the dollar was again repelled by selling interest, GBP/USD rallied again from below 1.5550 to re-test resistance in US trading. The pair, topped out around 1.5640 before retreating once again.

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